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United States v. Commercial Union Insurance Companies

decided: June 22, 1987; As Amended.

UNITED STATES OF AMERICA (SMALL BUSINESS ADMINISTRATION), THE VERMONT NATIONAL BANK, PLAINTIFFS, UNITED STATES OF AMERICA (SMALL BUSINESS ADMINISTRATION), PLAINTIFF-APPELLANT,
v.
COMMERCIAL UNION INSURANCE COMPANIES, DEFENDANT-APPELLEE



The Small business Administration appeal from the judgment following a bench trial before the United States District Court for the District of Vermont, Coffrin, C.J., holding that its insurance claim against Commercial Union is time barred by the one year contractual limitation contained in a personal property insurance policy issued to Vermont National Bank's now-bankrupt borrower.

Author: Meskill

Before: MESKILL and NEWMAN, Circuit Judges, and METZNER,*fn* District Judge.

MESKILL, Circuit Judge:

The Small Business Administration (SBA) appeals from the judgment entered after a bench trial before the United States District Court for the District of Vermont, Coffrin, C.J., holding that its insurance claim was time barred by the one year contractual limitation contained in a personal property insurance policy issued by Commercial Union Insurance Companies. We reverse and remand.

BACKGROUND

T.A. Electronics (T.A.), was a Springfield, Vermont Corporation that manufactured circuit boards and other electronic components. In 1979 and 1981, T.A. Borrowed $164,500 from Vermont National Bank in a series of loans guaranteed by the Small Business Administration and secured by a mortgage on T.A.'s inventory and equipment. T.A. insured the collateral against casualty loss as required by the loan agreements by purchasing a policy from a subsidiary of Commercial Union Insurance Companies.

The policy covered the period from August 5, 1980, to August 5, 1983, and imposed on T.A. as conditions of coverage numerous duties and restrictions. Paragraph 15 of the policy reads: "No suit shall be brought on this policy unless the insured has complied with all policy provisions and has commenced the suit within one year after the loss occurs."

Attached to and forming part of the policy was a standard form lender loss payable clause, It reads, in pertinent part: "This insurance, solely as to the interest therein of the lender . . . shall not be impaired or invalidated by any act or neglect of the borrower, mortgagor or owner of the within described property except as provided in the last paragraph hereof . . . ." The "last paragraph" reads: "All of the terms and conditions of the policy to which this Endorsement is attached and of which it is a part remain unchanged . . . ."

In March 1981, T.A. filed to make a required premium payment on the insurance policy. Commercial Union promptly cancelled T.A.'s coverage. In June 1981, T.A. filed a petition in bankruptcy. On the following November 12, fire destroyed T.A.'s property in Ludlow, Vermont, including the collateral securing the bank loans.

T.A. did not report the fire to Commercial Union; neither did Vermont National, although it was aware at an early date of the destruction of its collateral. Five months after the fire, the bankruptcy court approved the Trustee's report of no distribution and closed the estate.

In mid-October 1984, Commercial Union was notified that the bank would make a claim under the policy. A few days later the bank assigned its interest in the insurance policy to the SBA. In November 1984, almost three years after the fire, but well within the general six year Vermont statute of limitations for civil actions. 12 V.S.A. ยง 511 (1973), Vermont National, as mortgagee claiming under the lender loss payable clause, commenced this action against Commercial Union. SBA joined the action as Vermont National's assignee. Commercial Union answered, pleading among its special defenses and policy's one year limitation period.

After a bench trial, the court held that Commercial Union never cancelled the loss payable clause with respect to the bank, a holding not challenged on appeal. the court considered but found unpersuasive Vermont National's argument that the one year limitation in paragraph 15 applied only to "the insured" and not to the mortgagee. The court concluded that the lender loss payable clause incorporated and was consistent with the policy's one year limitation period. It found the period reasonable under the circumstances and held that recovery under the policy was time barred.

SBA brought this ...


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