495 F. 2d 1211 - Buehler Corporation v. Home Insurance Company

Richard D. Wagner, Indianapolis, Ind., for plaintiff-appellant.

Mark W. Gray, John T. Lorenz, Indianapolis, Ind., for defendants-appellees.

Before FAIRCHILD and CUMMINGS, Circuit Judges, and JAMESON, Senior District Judge.*

JAMESON, Senior District Judge.

Appellant, The Buehler Corporation, brought this action to recover for the loss by fire of a building owned by it and covered by three insurance policies issued by appellees, The Home Insurance Company, Glens Falls Insurance Company, and Great American Insurance Company. Most of the facts were stipulated. Following a non-jury trial the court entered judgment for the appellee insurers.

Each policy, issued May 31, 1968 for a three-year term, insured appellant's 'Building No. 2', 'Building No. 3', and machinery and equipment stored in Building No. 3 for fire, extended coverage, vandalism and malicious mischief. The machinery and equipment stored in Building No. 3 were also insured against loss from sprinkler leakage. Premiums were paid annually in a lump sum in advance of each year's coverage.

Building No. 3, insured for a total of $150,000,1 was destroyed by fire on October 5, 1970. Each policy provided that its 'Automatic Sprinkler Clause * * * applies to Building No. 3 from May 1 to October 31 each year'. This clause reads:

'This policy being written at a rate based on the protection of the premises by the sprinkler system, it is a condition of this policy that, insofar as the sprinkler system and water supply therefor are under the control of the Insured, due diligence shall be used by the Insured to maintain them in complete working order, and that no change shall be made in the said system or in the water supply therefor unless immediate notification is given to the Rating Bureau. Permission, however, is hereby given in case of break, leakage, or the opening of sprinkler heads, to shut off the water from so much of the sprinkler system as may be imperatively necessary, it being a condition of this policy that the Rating Bureau will be immediately notified and the protection restored as promptly as possible.'

The district court found that it was 'clear that plaintiff violated this condition of the policies. Because of a broken valve which was not promptly repaired, the sprinkler system in Building No. 3 was completely inoperative at the time of the fire on October 5, 1970'; and 'had been inoperative since approximately the middle of June 1970.2 Plaintiff never advised the Rating Bureau that the sprinkler system in Building No. 3 was not in working order, as required by the policies.'

During the course of their investigation of the fire loss appellees, on November 9, 1970, discovered that the sprinkler system was inoperative at the time of the fire. By letter dated January 28, 1971 appellees denied liability on the ground that appellant had violated 'the condition of the policy, requiring that the automatic sprinkler system be maintained in working order by due diligence on your part'.3 Appellees did not tender or return to appellant any of the premium paid for the policies; nor did appellant at any time seek return of any portion of the premium.

Appellant does not challenge the district court's finding that it violated a condition of the policy. Rather it contends, as it did in the district court, that under Indiana law appellees 'are precluded from avoiding liability because they retained all paid premium after they acquired knowledge of (appellant's) violation of the policy condition'.

Appellant relies heavily on Farmers Conservative Mut. Ins. Co. v. Neddo, 111 Ind.App. 1, 40 N.E.2d 401, 405 (1942), where the court held that 'The rule is firmly established that an insurer is precluded from asserting a forfeiture, where, after acquiring knowledge of the facts constituting a breach of a condition, it has retained the unearned portion of the premium or has failed to return or tender it back with reasonable promptness.'4 Neddorecognizes that 'there may be some confusion' in prior decisions; but it is clear from Neddo and cases there cited5 that under Indiana law a retention of premiums, following violation by the insured of a condition which renders the entire policy voidable, constitutes waiver by the insurer of his right to avoid liability, even though knowledge of the violation is first obtained after the loss.6

The district court did 'not question the validity of Neddo', but distinguished it on the ground that the condition subsequent violated in that case rendered the entire policy voidable,7 whereas here the policy is divisible and the breach of the sprinkler condition affected only the insurance coverage with respect to Building No. 3.8 Moreover, even this coverage was not entirely voidable, since each policy provided that the sprinkler condition was applicable to Building No. 3 only during the period 'from May 1 to October 31 each year'.9

We agree with appellant that 'No Indiana precedent specifically discusses the effect of the divisibility of an insurance policy upon the application of the doctrine of waiver to the facts of this case.'10 In fact, the parties have not cited, nor have we found, any case which expressly considers the effect of the divisibility of an insurance policy on an asserted waiver of a breach of a condition subsequent by failure of the insurer to tender or return premiums. Where no controlling state precedent can be found appellate courts give great weight to the view of the state law taken by a district judge experienced in the law of that state, although the parties are entitled to a review of the trial court's determination of state law just as they are of any other legal question in a case.11 We conclude that the district court has drawn a valid distinction between Neddo and the facts in this case.

The insurance company in Neddo argued that 'it should not be required to return or tender the return of unearned premium' since 'it did not forfeit the entire policy because of breach of conditions, but * * * forfeited the policy only insofar as it covered the property that was destroyed, and * * * maintained the policy in force upon all other property described therein'. 40 N.E.2d at 406. In considering this contention the court did not hold that divisible policies are also subject to the requirement that premiums be returned, but found rather that under the facts in that case the policy was not divisible, and concluded that 'the insurer could not properly set up the divisibility thereof as a reason for not returning, or offering to return, the unearned premiums upon destroyed property.' Id. at 407.12

In both Neddo and Robinson, supra n. 5, the policies provided that they 'shall be void' if the insured buildings were vacant for ten days.¹³ In construing this provision the Supreme Court of Indiana in Robinson said in part:

'It is settled that a provision in an insurance policy that it shall subsequently become void upon the happening of a certain event, such as the premises becoming vacant, is to be construed as making the policy voidable only upon the happening of the event, at the option of the insurer, and if the insurer desires to exercise the option and rescind the contract, it is required to act promptly, inform the insured of its election, and return, or offer to return, all unearned premiums; and a failure in this respect will be deemed a waiver, and the insurer will be deemed to have elected to waive the right to cancel. An insurer may not retain unearned premiums and at the same time disclaim liability during the period covered by the premiums.' 10 N.E.2d at 605.

None of the policies in this case contain a provision that the policy 'shall be void' upon a violation of a policy condition or the happening of a certain event. Other risks remained insured after the fire loss in Building No. 3. The defendants did not declare the polcies void or exercise any option to rescind the contract. They simply exercised their right to deny liability by reason of a breach of a policy condition requiring appellant to keep the sprinkler system in working order during a specified period-- May 1 to October 31.

The holdings in Robinson and Neddo are consistent with the district court's conclusion that the appellee insurers were not precluded from avoiding liability because they did not return any of the premium, and that the rule that a failure to return unearned premiums constitutes a 'waiver of the right to cancel' the policy is not applicable where, as here, there is no provision making the policy void 'upon the happening of a certain event', there is an express provision making the insurance coverage divisible, and a breach of a condition subsequent does not affect the validity of the insurance on other items of property and risks covered under the same policy.14

Affirmed.