Intermetal Mexicana, S.a. v. Insurance Company of North America, Appellant, 866 F.2d 71 (3d Cir. 1989)

This appeal arises from an order of the district court denying defendant's post-trial motions for Judgment Notwithstanding the Verdict, a New Trial, and/or an Order Molding, Amending or Modifying the Judgment. The district court had entered a judgment on September 10, 1987 which directed the defendant to pay the plaintiff the sum of $3,649,309.77 under the terms of the insurance policy at issue. Upon review, we conclude that the district court erred in its construction of the policy and will reverse and remand.

The underlying dispute in this case raises the question of whether the plaintiff, Intermetal Mexicana, S.A. ("IMSA"), an affiliate of International Mill Service, Inc. ("IMS"),¹  has a valid claim for payment from the defendant Insurance Company of North America ("INA") for the value of machinery that INA insured. IMSA brought suit against INA in the Eastern District of Pennsylvania on December 1, 1984, seeking to recover the replacement cost of eleven pieces of equipment. This is a diversity action in which Pennsylvania law applies. This Court has jurisdiction of the appeal pursuant to 28 U.S.C. § 1291.

On March 20, 1982, IMS and INA entered into a written insurance contract entitled "Contractors Machinery and Equipment Floater Policy No. 70HF228" ("the policy"). App. at 1159aa. The policy covers "all risks of direct physical loss or damage from any external cause except hereinafter excluded." App. at 1159ee. The policy also provides that the insurer's duty to indemnify applies to "items ... entered in the Schedule, whilst at a location or in transit thereto or therefrom within the territorial limits of the policy" in the event such items "suffer any unforeseen and sudden physical loss or damage from any cause, other than those specifically excluded...." App. at 1159cc. The parties agree that the insurance policy covers the IMSA equipment at issue here.

The equipment which was the subject of the underlying dispute is titled to IMSA. IMSA is a Mexican corporation that is jointly owned--sixty percent of the stock being owned by IU Corporation, Inc. ("IU")²  and forty percent being owned by a Mexican national named Raoul Martinez. Martinez was a director of IMSA during this period and he apparently exercises control over a separate construction-equipment dealership, Ter-Mexicana, S.A. ("Ter-Mexicana").³  According to IMSA, Martinez functioned as a "sleeping partner," i.e., he did not act for or participate in the operations of IMSA. App. at 288-89, 319.

IMSA began to lose money in the late 1970's. IU and Martinez, the shareholders of IMSA, agreed to loan IMSA $600,000. Martinez assumed forty percent of the responsibility for the loan ($240,000) and IU, sixty percent ($360,000)--reflecting the proportion of their equity ownership. Martinez then persuaded Ter-Mexicana to loan IMSA the $240,000. App. at 124. The loan was not secured by IMSA's equipment or by any other collateral. App. at 129, 325.

At the time the policy was issued, the insured equipment was located at Altos Hornos Steel Mill ("AHMSA") in Montclova, Mexico. In June or July, 1982, a decision was made to cease operations at the two IMSA sites in Mexico--Sicartsa and AHMSA in Montclova--as the result of deteriorating business conditions. Late in 1982, IMSA moved the equipment in Montclova to a storage location known as Frontera in Coahuila, Mexico. On September 23, 1983, INA was informed that the eleven pieces of equipment at issue had been moved from the AHMSA site to a non-scheduled uninsured location under the policy as it was then written, and that IMSA wished to secure an endorsement in order to provide coverage at the new location. App. at 826. INA was also advised that the equipment was being held by the Mexican partner, Martinez. INA subsequently issued Endorsement No. 11.

On July 15, 1983, Martinez and Ter-Mexicana obtained a court order ex parte and without notice to IMSA entitling Martinez and Ter-Mexicana to obtain possession of the eleven pieces of insured equipment which had been moved to Frontera.⁴  On July 16, 1983, representatives of Ter-Mexicana went to Frontera, took possession of the equipment pursuant to the court order and removed it to a fenced-in lot under Ter-Mexicana's control. Apparently, this was a strategy by which Martinez sought to induce repayment of the $240,000 loan which IMSA owed him.

IMSA's Mexican counsel promptly commenced legal action to recover the equipment. App. at 566. On November 25, 1983, IMSA obtained a court order directing Ter-Mexicana to return the equipment to IMSA. When the IMSA representatives arrived on November 25 to retrieve the equipment, employees of Martinez and Ter-Mexicana refused to admit them, threatening them with physical violence. The employees then immobilized the equipment by partially dismantling it. IMSA's representatives, although legally entitled at the time to the return of the equipment, were forced to retreat. IMS sent INA a Sworn Proof of Loss Statement on May 18, 1984. On that same day, INA mailed a reservation of rights letter to IMS. INA denied the IMS claim of theft under the policy and this litigation ensued.

The case was tried by a jury in June, 1987. At the conclusion of the trial, the jury was charged that July 16, 1983 was the date of the loss.⁵  Because the district court held that the loss occurred on July 16, 1983 as opposed to November 25, 1983, it found that it was unnecessary to reach the issue of whether IMSA misrepresented facts in the interim period when it secured the endorsement.⁶  Finally, the district court found no evidence that Martinez or Ter-Mexicana would share in any recovery IMSA made from INA and consequently held against INA on its equitable claim that IMSA's damages must be reduced by forty percent. App. at 1827-28. The court then entered judgment for IMSA for the scheduled value of the insured equipment, plus pre-judgment interest. App. at 1797. On June 29, 1988, the district court issued an Opinion and Order rejecting each of INA's post-trial motions. INA now appeals.

INA first argues on this appeal that the district court erred in failing to hold the loss not "fortuitous" as a matter of law and second, that the court erred in not finding that the "earliest possible date of [any] loss [under the policy] is November 25." Appellant's Brief at 26. Third, INA contends that the district court erred in taking from the jury the issue of misrepresentation in connection with the procurement of Endorsement No. 11.⁷  Finally, INA contends that any verdict in favor of IMSA should have been reduced by forty percent in light of the alleged misfeasance of Martinez.

First, with respect to the issue of whether the loss was fortuitous, the question of fortuity is a question of law for the court. We have plenary review on this question. Compagnie des Bauxites v. Insurance Co. of N. Am., 724 F.2d 369, 371-72 (3d Cir. 1983). Second, our review of the district court's determination of the date of the loss presents a legal question over which our review is also plenary. Gavalik v. Continental Can Co., 812 F.2d 834, 850 (3d Cir.), cert. denied, --- U.S. ----, 108 S. Ct. 495, 98 L. Ed. 2d 492 (1987); Ortiz v. Eichler, 794 F.2d 889, 891 (3d Cir. 1986). Whether or not the district court erred in not submitting the issue of misrepresentation (in connection with the procurement of the endorsement) to the jury is likewise a legal question over which we have plenary review. Finally, the question of whether IMSA's recovery should be reduced by forty percent was decided by the district court as a question of equity law on the record before him. Our review of his findings of facts should be affirmed unless clearly erroneous. Fed. R. Civ. P. 52(a). We must determine, on the basis of these findings, whether the district judge abused his discretion in denying INA's motion to have the amount of the judgment reduced by forty percent.

The policy at issue is what is commonly known as an "all-risk" policy. Section VI of the policy states that INA insured covered equipment against "all risks of direct physical loss or damage from any external cause" except those causes specifically excluded.⁸  In addition to the exclusions named in the policy itself, "every 'all-risk' contract of insurance contains an unnamed exclusion--the loss must be fortuitous in nature." Cozen & Bennett, Fortuity: The Unnamed Exclusion, XX Forum 222, 222 (Winter 1985) (emphasis in original). As a general rule, an "all-risk" policy:

is to be considered as creating a special type of coverage extending to risks not usually covered under other insurance, and recovery under an "all-risk" policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.

13A Couch Cyclopedia of Insurance Law Sec. 48:141, at 139 (1982) (footnote omitted). This Court has followed the general rule. See, e.g., Peters Township School Dist. v. Hartford Accident & Indem., 833 F.2d 32, 37 (3d Cir. 1987) ("all-risk" policies "afford coverage for all risks which are not excluded."); Compagnie des Bauxites v. Insurance Co. of N. Am., 724 F.2d 369, 372 (3d Cir. 1983) (such a policy requires "fortuitousness" of the risk.).

The term "all-risk" has been said to be "somewhat misleading." See Cozen & Bennett, supra, at 225 n. 19. "All-risk" is not synonymous with "all loss." See Hampton Foods, Inc. v. Aetna Casualty & Sur. Co., 787 F.2d 349, 352 (8th Cir. 1986); Standard Structural Steel Co. v. Bethlehem Steel Corp., 597 F. Supp. 164, 191 (D. Conn. 1984) (stating that " [t]he label 'all risk' is essentially a 'misnomer' " and that " ' [a]ll risk' policies are not 'all loss' policies") (citations omitted). Indeed, the questions of "loss" and "risk" are separate and distinct. See, e.g., Miller v. Boston Ins. Co., 420 Pa. 566, 218 A.2d 275 (1966) (in an all risk policy, the insured-plaintiff's prima facie case consists of showing that a loss was sustained and that the loss falls within the risks insured against).⁹  First we turn to the question of whether a loss occurred on July 16, 1983.

A. The Question of Compensable Loss As Of July, 1983.

INA argues on appeal that " [e]ven if loss was fortuitous here, there was no direct physical loss or damage to the eleven pieces of equipment seized by Martinez and Ter-Mexicana, at least prior to November of 1983." Appellant's Brief at 20. Both at trial and at the post-trial motion stage of the proceedings, the district court rejected INA's argument that there was no direct physical loss and instead found that " [t]here is no basis on the record for a finding that the loss of equipment was other than a permanent, total loss." App. at 1805.¹⁰ 

Under an "all-risk" policy, "the only questions which need be decided ... are whether [the plaintiff] has suffered a loss and, if so, whether such loss is excluded from coverage under the policy." Plaza 61 v. North River Ins. Co., 446 F. Supp. 1168, 1170 (M.D. Pa.), aff'd., 558 F.2d 822 (3d Cir. 1978). INA argues that Plaza 61 and Young-Peterson Construction Inc. v. Potomac Ins. Co., 382 F.2d 400 (7th Cir. 1967), cert. denied, 390 U.S. 921, 88 S. Ct. 854, 19 L. Ed. 2d 980 (1968), hold that there is no compensable loss under an all-risk policy until a court of competent jurisdiction determines who may legally possess the property insured. Appellant's Brief at 24.¹¹  Thus, INA argues, no loss could have occurred until November 25, 1983. We disagree with this interpretation of the cited authorities. Whether or not Martinez and Ter-Mexicana took the equipment under a claim of right on July 16, 1983 is only relevant if the policy specifically provides that theft or other takings are excluded from coverage.¹²  On this basis, Plaza 61 and Young-Peterson are distinguishable. Naturally, when the insured's coverage is limited to "theft" as it was in Plaza 61 and Young-Peterson, and the insurer shows that the dispossessor did not have the requisite intent, but instead acted under a claim of right, the insured's loss is not covered. Indeed, the question in Young-Peterson was whether the jury could have reasonably concluded that the taking was in good-faith so as to not be within the theft exclusion in the policy.¹³  The actual disposition of the validity of the taking was held to be irrelevant. See Young-Peterson, 382 F.2d at 403.

Since INA conceded during oral argument that the policy contains no such specific exclusions which could exempt from coverage any loss which may have occurred on July 16, 1983, we hold that, based on the policy of construing all-risk policies broadly, a loss did occur on July 16, 1983. See Compagnie des Bauxites, 724 F.2d at 373 (stating that "a Pennsylvania court today would interpret the coverage of an all-risks policy broadly."). Further, policy terms must be given their plain and ordinary meanings where the language used is clear and unambiguous. Pennsylvania Mfrs. Ass'n Ins. Co. v. Aetna Casualty & Sur. Co., 426 Pa. 453, 457, 233 A.2d 548, 551 (1967). The evidence is undisputed that IMSA lost possession and control over the insured equipment on July 16, 1983 and that it has not had possession or control of the equipment since that date. We find that such an absence of possession and control falls within the plain meaning of "loss." Because we agree with the district court that "the claim-of-right issue ... relates not to the existence of a 'direct physical loss,' " app. at 1806, but rather to the question of fortuity, we proceed to the question of whether the loss falls within the judicially-created "fortuity" exclusion from coverage. See Compagnie des Bauxites, 554 F. Supp. 1080, 1084 (W.D. Pa. 1983) (stating that "the concept of a fortuitous event is a court imposed requirement of the law pertaining to contracts of insurance"), rev'd on other grounds, 724 F.2d 369 (3d Cir. 1983).

B. Fortuity Of The July 16, 1983 Loss.

The jury found that IMSA had suffered an "unforeseen and sudden loss." App. at 1805. The district court, in reviewing INA's post-trial motions, found " [n]othing in defendant's presentation [which] warrants overruling that finding." Id. INA, in support of its motion for judgment notwithstanding the verdict, argued to the district court that IMSA's loss was not fortuitous as a matter of law, and therefore, falls within the judicially-created doctrine excluding non-fortuitous losses from all-risk insurance coverage.

We agree with INA's contention that the question of fortuity is a legal question for the court. See, e.g., Compagnie des Bauxites, 554 F. Supp. at 1082 (stating that " [t]he determination of whether a loss is fortuitous is a legal question for the court to determine."), rev'd on other grounds, 724 F.2d 369 (3d Cir. 1983); Redna Marine Corp. v. Poland, 46 F.R.D. 81, 87 (S.D.N.Y. 1969) (stating that "the characterization of loss as 'fortuitous' is a legal conclusion to be distinguished from the facts upon which it is based."). See also Cozen & Bennett, supra, at 231 (stating that "fortuity ... is a question of law" and that the "application of the fortuity doctrine to the facts of a particular case is a question of law for resolution by the court."). In Compagnie des Bauxites, a diversity case applying Pennsylvania law, this Court found that the definition of a fortuitous event that Pennsylvania would adopt is that found in the Restatement of Contracts, namely:

A fortuitous event ... is an event which so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within the control of third persons; it may even be a past event, such as the loss of a vessel, provided that the fact is unknown to the parties.

724 F.2d at 372 (quoting Restatement of Contracts Sec. 291 comment a (1932)) (emphasis in original). We acknowledge that most courts which adhere to the above-cited definition of fortuity agree that the "burden of demonstrating fortuity is not a particularly onerous one," Morrison Grain Co. v. Utica Mut. Ins. Co., 632 F.2d 424, 430 (5th Cir. 1980); however, there is nothing fortuitous about the fact that a creditor such as Ter-Mexicana would resort to the courts to obtain collateral for unpaid debts. Nor is such a business dispute outside the parties' realm of control.¹⁴  IMSA may have temporarily lost the use and enjoyment of its equipment, but only as a result of a proper order of the court which temporarily relieved IMSA of its possessory rights.¹⁵  It is generally recognized that it is against public policy to allow insurance coverage on a certainty. See Cozen & Bennett, supra, at 233. In the context of a commercial debtor-creditor relationship, it is to be expected that parties may resort to the courts for resolution of disputes arising out of such relationships. Under the circumstances herein, the concept of risk that is inherent in all policies of insurance is lacking. App. at 759. Thus, we conclude that the taking of the equipment on July 16, 1983 as a result of a valid court order issued on the previous day is not a fortuitous event.

C. The November, 1983 Taking.

The court order obtained by IMSA on November 25, 1983, which overruled the earlier court order of July 15, 1983, required Raoul Martinez and Ter-Mexicana to return the equipment to IMSA. Martinez and Ter-Mexicana had no legal right or justification to refuse to honor the November 25 order. General Counsel for IMS, Larry Meran, testified that when IMSA employees went to retrieve the equipment, some of the equipment "was found in a condition totally abandoned and with disinflated tires, disconnected cables and some parts such as batteries, solenoids, generators and motors in poor repair...." App. at 139. One such employee claimed that he was "verbally assaulted" by Rodolfo Martinez who was in charge of the place where the equipment was being kept. Meran testified that Rodolfo Martinez gave instructions to his subordinates "to impede at all cost the functioning and movement of the machinery," id., and that, according to Meran, it was clear that "even with a valid legal order ruling in [his] favor that the equipment is to come back, [IMSA] still couldn't get the equipment, and [he] questioned how efficient the legal proceedings in Mexico would be for [IMSA]." App. at 141.

Ample authority exists for the proposition that such "all-risk" language (as that which exists in the present case) covers conversion. See, e.g., Buckeye Cellulose Corp. v. Atlantic Mut. Ins. Co., 643 F. Supp. 1030, 1036 (S.D.N.Y. 1986) (recognizing that a provision insuring " [a]gainst all risks of physical loss or damage from external cause ..." would provide coverage against conversion); Great Northern Ins. Co. v. Dayco Corp., 620 F. Supp. 346, 350-51 (S.D.N.Y. 1985) ("All Risks of Direct Physical loss" held to include theft by false pretenses). A conversion is the "deprivation of another's right of property in, or use and possession of, a chattel, without the owner's consent and without legal justification." Welded Tube Co. of America v. Phoenix Steel Corp., 512 F.2d 342, 345 (3d Cir. 1975). There was no theft or conversion on July 16, 1983 since the equipment was moved pursuant to a valid court order. However, we hold that a fortuitous loss did occur on November 25, 1983 as a result of the conversion of the equipment in the face of a valid court order. It is reasonable to expect that a valid court order will be obeyed. When parties fail to comply with a court order, in this case to return property pursuant to a valid court order--thereby converting such property--a fortuitous event has occurred.

INA argues on appeal that because the district court held that the loss occurred on July 16, 1983, the jury never addressed INA's defenses of misrepresentation with respect to endorsements obtained after July 16, 1983. We agree. While the jury clearly addressed the question of whether there had been any material misrepresentations with respect to the claim, the jury did not address the question of whether misrepresentations had been made in the course of obtaining the endorsements. App. at 1840.¹⁶  However, the district judge did address the question of whether misrepresentations had been made in the course of obtaining the endorsements during his consideration of INA's post-trial motions. Adjudicating pursuant to its equitable powers, the district court made the finding of fact that "the representations made in connection with the issuance of endorsement number 11 were not representations which can be characterized as being proved to be false by a standard of clear, precise and unequivocal proof." App. at 1839-40.

We find that the district court erred in making such a finding. INA is entitled to a jury determination on the question of misrepresentation. See American Home Assurance Co. v. Sunshine Supermarket, Inc., 753 F.2d 321, 327-28 (3d Cir. 1985); De Bellis v. United Benefit Life Ins. Co., 372 Pa. 207, 93 A.2d 429, 430 (1953) (stating that " [o]rdinarily the question of the truth or falsity of the answers and whether or not they were given by insured in good faith is for the jury.") (quoting Evans v. Penn Mut. Life Ins. Co., 322 Pa. 547, 555, 557, 186 A. 133, 139 (1936).¹⁷  Therefore, we will remand this issue for fact-finding by the jury.

INA argues that this verdict or any verdict on remand in favor of IMSA should be reduced by forty percent since IMSA's claim arises from the wrongful conduct of Raoul Martinez and since Ter-Mexicana is essentially the alter ego of Martinez. In addressing the claim, the district judge ruled as a matter of law and instructed the jury that "within the meaning of the policy, the relevant exclusion 'N,' in talking about insured, did not include Mr. Martinez, notwithstanding that he was a 40 percent shareholder in IMSA, and did not include Martinez' company, TerMexicana." App. at 1843.¹⁸  The district judge also rejected INA's argument that as a matter of Pennsylvania law, Martinez must be regarded as a co-insurer. App. at 1843. Instead, the district judge held Martinez to be a "third-party malefactor" whose interest is not "even close to the range of interests that would limit, let alone preclude altogether, recovery...." Id. No evidence of collusion was found between IMSA and Mr. Martinez or Ter-Mexicana, nor was there any indication in the record that Mr. Martinez or his company stood to gain from IMSA's recovery. Accordingly, we affirm this portion of the judgment.

In summary, we hold that the district court erred in submitting the question of fortuity to the jury. As a matter of law, we hold that the July 16, 1983 taking under a valid court order was not a fortuitous event under the circumstances presented herein. Instead we find that it was not until November 25, 1983 that a fortuitous loss occurred. In addition, we find that the district court erred in not submitting the question of misrepresentation to the jury. Therefore, we will reverse and remand this portion of the judgment. Finally, we will affirm the district court's conclusion that any recovery by IMSA is not subject to a reduction due to the equity investment of Martinez.

Costs taxed against appellee.