The opinion of the court was delivered by: GAGLIARDI
American Record Pressing Co. ("ARP"), a Michigan corporation formerly engaged in the manufacture of records and tapes and a wholly owned subsidiary of Viewlex Corp., commenced this action to recover $ 1,000,000 under a third party comprehensive liability insurance policy ("CEP policy") as a result of losses sustained in a fire at its factory in Owosso, Michigan on October 28, 1972. The CEP policy was issued by the defendant, the United States Fidelity & Guaranty Co. ("USF&G"), a Maryland corporation. Jurisdiction is premised upon diversity of citizenship, 28 U.S.C. § 1332. This action was tried to the court. The following constitutes the court's findings of fact and conclusions of law pursuant to R. 52(a), Fed.R.Civ.P.
On August 19, 1970, USF&G issued special multi-peril policy No. A16679 ("SMP policy") to the plaintiff which, as amended June 3, 1972, provided coverage in the amount of $ 129,000 for losses to "machinery, equipment and customers' goods"
located at plaintiff's factory. In addition to this SMP policy, thirteen other SMP policies providing additional coverage in varying amounts of the same property were issued to the plaintiff by various other carriers.
Since the quantity and value of customers' goods held by ARP was subject to fluctuations, ARP officials periodically informed the insurers of the total amount of insurance they wished to have in effect at a given time. Several weeks before the Oct. 28, 1972, fire, James Shanahan, comptroller of Viewlex, under instructions from Norman Dufour, President of ARP, notified the fourteen SMP insurers that the value of customers' goods on hand at the ARP plant was $ 501,000, a figure representing manufacturer's cost and not fair market value. At the time of the fire, the total amount of coverage of the fourteen SMP policies was $ 1,434,000. These SMP policies also contained a 100% Co-insurance clause requiring ARP to be insured at full value or become a co-insurer for any loss in excess of the insured value.
The defendant subsequently issued two other policies with different coverage to the plaintiff: 1) on September 15, 1971, Special Multi-peril Policy No. 340310 ("Policy No. 340310") (Plaintiff's Exhibit 8) covering business interruption losses up to $ 50,000 and personal property (consisting of "stock and furniture and fixtures") losses up to $ 200,000 and 2) on March 13, 1972, Comprehensive Excess Liability Policy No. 19149 ("CEP policy") having an occurrence limit of $ 1,000,000. The present claim is brought under the CEP policy which defined its coverage as follows:
3.1. COVERAGE. The Company will indemnify the insured for all sums which the insured shall become obligated to pay as damages and expenses . . . by reason of liability imposed upon the insured by law, or by contractual liability, because of (1) personal injury or property damage caused by . . . an occurrence which takes place anywhere.
The policy also provided that, as an excess policy, it became operative only in situations in which the "ultimate net loss resulting from any one occurrence (exceeds) . . . the underlying limit . . ." (CEP policy § 3.2). The "underlying limit" was in turn defined as "insurance policies described in Section 1.7 . . . and the insurance available to the Insured under any other insurance policy applicable to the occurrence" (Id. § 2.15).
The fire that occurred at the plaintiff's plant on October 28, 1972 caused severe damage to the physical structure of the plant and its contents. The parties agree that Policy No. 340310, the SMP, and the CEP policy were in effect at the time (Tr. 2-3). Approximately six weeks after the fire, ARP retained Gerald Marshall, President of Goldstein Associates, to adjust its loss (Tr. 133). ARP initially submitted proofs of loss to its machinery and equipment in the amount of.$ 1,188,920 and to customers' goods in the amount of $ 1,222,974 a total claim of $ 2,411,894. The carriers retained the General Adjustment Bureau (GAB) to adjust the loss on their behalf, with Holt Derrick acting as supervising adjuster. After the claims were reviewed and audited, Marshall and Derrick agreed upon the following valuations: $ 813,885 for losses to machinery and equipment, and $ 988,913 for losses to customers' goods, a combined audited claim of $ 1,802,798 (Tr. 92). In determining the portion of the $ 1,802,798 adjusted loss covered by the SMP policies, the insurers invoked the 100% Co-insurance clause. The parties agreed that in order to avoid invocation of the co-insurance clause, ARP should have had coverage of at least $ 1,848,072 representing the audited loss of $ 1,802,798 and salvage value of $ 45,274. Accordingly, at a meeting on October 2, 1973 the SMP carriers and Viewlex agreed upon a figure of $ 1,398,870 as the SMP carriers' liability under their policies.
Long before this figure was agreed to, however, ARP's customers became impatient at the delay in receiving payment of their losses from the fire. Shanahan testified that the customers began sending letters to ARP stating that they had not received payment for their losses and deducting the amount of their losses from the amounts they owed to ARP or other Viewlex subsidiaries. (Defendant's Exhibits C and D). Each of these letters was identical except for the customer's name, signature and amount of the claimed loss. (Id.) While Shanahan initially testified that the claim letters were authored by ARP customers (Tr. 71-72), he admitted on cross-examination that he had prepared all of the letters himself (Tr. 73, 75).
Shanahan also testified that after recognizing that ARP was negligent in not having adequate coverage to insure fully the loss under the SMP policies, he and David Peirez, the president of Viewlex, and Leslie Levine, the assistant secretary of Viewlex, determined that the proceeds of the SMP policies should be first applied to satisfy ARP's losses to its machinery and equipment (Tr. 67-68). The ARP officials further concluded that they would permit customers to credit their accounts in the amount of their losses, and that ARP would make a claim under the CEP policy to recoup the total amount of the customer credits. Evidence was introduced at trial showing that these credits totalled $ 873,818.01.
Shanahan also testified that ARP did not give notice of this set-off arrangement to USF&G or to any of the carriers' agents (Tr. 57-61).
In August 1973 the SMP carriers made an advance payment of $ 500,000 on account to ARP and the balance of $ 898,870 was paid at the October 2, 1973 meeting. Upon delivery of the second payment, ARP turned over to the carriers receipts, releases and discharges executed by ARP customers which acknowledged the receipt of unspecified good and valuable consideration and released and discharged the named SMP carriers from any claims which the customers had either against the carriers under SMP policies or against ARP. (Defendant's Exhibits A & C). The releases specifically reserved to the customers any rights or claims they might have against the carriers and ARP with respect to any other policies of insurance.
There was conflicting testimony offered at trial on the issue of whether or not the SMP carriers specified that the $ 500,000 advance payment was attributable to a particular loss. Derrick testified that the insurers told the plaintiff that his payment was to be applied only to plaintiff's machinery and equipment loss (Tr. 204), leaving an unpaid balance on plaintiff's own audited loss of $ 313,885 (GAB Report 8/13/73). Shanahan and Levine, in contrast, testified that the insurers never indicated that this or any other payment was to be allocated to any specific property: "it was just one lump sum figure, one million, three hundred and ninety eight. There was nothing allocated between the records and the machinery and equipment" (Shanahan Tr. at 87); the parties expressly "agreed not to itemize" the final settlement (Levine Tr. at 107). The court determines that the testimony of Shanahan and Levine represents the more accurate description of the August advance. This finding is based upon the demeanor of the witnesses at trial and a careful review of the record. Furthermore, it seems highly unlikely that the carriers would have requested ARP to satisfy its own losses first regarding the August advance when nothing in the record indicates that the carriers extracted a similar promise regarding the remaining proceeds paid to ARP at the October 2, 1973 meeting.
From the proceeds of the SMP insurance money, ARP reimbursed two of its customers, Motown Records and Encyclopedia Britannica, $ 16,248.34 and $ 21,379.73 respectively for their losses arising out of the fire, and paid Savings Bank of Owosso $ 277,973.30 in satisfaction of a lien on the destroyed machinery and equipment (Tr. 9, 42, 56, 63). The balance of the insurance proceeds, $ 1,083,268.43, an amount in excess of ARP's audited loss, was credited to the accounts of ARP and Viewlex as reimbursement for the set-offs given to ARP's customers for their losses.
The CEP policy contains the following provisions:
5.3. INSURED'S DUTIES IN THE EVENT OF OCCURRENCE, ...