The opinion of the court was delivered by: WEBER
This case involves the liability of an insurance company for damage to personal property by fire where the damaged property was in the possession of the insured Lessee at the time of the loss under a counter-bond in an Action of Replevin brought by the Lessor of the property against the Lessee, after notice of termination of the Lease for default by the Lessee, where the Lessee denied default and claimed the right of possession. The matter was submitted to the court under a Stipulation of Facts.
1. In 1964 Plaintiff Andy Gard Corporation received possession of (inter alia) six plastic molding machines under lease-purchase agreements from H P M Corporation, the manufacturer of the machines. Andy Gard paid an initial security deposit, was required to make sixty monthly payments and was entitled to purchase the machines at the end of any year for a decreasing balance due. The agreements are identical in their pertinent provisions, they bear the designation "Lease" and H P M Corporation is identified as "Lessor" and Andy Gard Corporation is designated "Lessee".
2. At all times material, legal title to the machines remained in H P M Corporation, the original Lessor.
3. At all times material physical possession of the machines remained in Andy Gard at its manufacturing plant.
4. H P M, the original Lessor, assigned its rights as Lessor under the agreement to Talcott, Inc. in 1964.
5. The lease-purchase agreements required Andy Gard to pay taxes on the machines, keep them in repair, and to insure them against loss, and to return the property to the Lessor at the end of the Lease or in the event of default. Lessee was not permitted to remove, loan, part with possession, sublet or dispose of the property, nor assign or transfer the Lease.
7. On August 29, 1966, Talcott, Inc., notified Andy Gard that the Leases were in default by failure to make monthly payments since May 1966. The notice demanded payment of unpaid rentals, of termination of the Leases, and demanded the return of the leased property.
8. On September 26, 1966, Talcott filed a Replevin Action in the Court of Common Pleas of Allegheny County, Pennsylvania, demanding possession of the property and posted a Replevin Bond of $850,000. Andy Gard filed a counter-bond in the same amount and retained possession of the machines to abide the determination of the claims.
9. Andy Gard's Answer to the Complaint in Replevin admitted the existence of the Leases, admitted receipt of the notice of default, but denied any default under the Leases. Andy Gard alleged that Talcott was liable to it for large sums of money collected on its accounts receivable for which a separate suit had been instituted by Andy Gard in the United States District Court. Andy Gard's Answer to the Replevin suit asked that it be found entitled to possession of the machines and that it be awarded costs.
10. During the pendency of the above actions the six machines were damaged by fire while in the plant premises of Andy Gard on January 28, 1967.
11. Defendant Blackstone Mutual Insurance Company insured Andy Gard at the time of the loss for damage by fire under the following policy provisions:
"Unless otherwise provided herein, if this Policy covers personal property owned by the Insured, it shall also cover while in the custody of the Insured on the described premises or in the open within 500 feet thereof: (a) personal property of others which the Insured is under obligation to keep insured: (b) the interest of the Insured in and legal liability for loss or damage by any of the perils herein insured against to personal property belonging to others."
12. No question has been raised that any legal liability for loss or damage would fall on Andy Gard because of its negligence in causing said loss.
13. The six machines covered by this submission are the six machines described in Paragraph 2 of the Stipulation submitted by the parties.
Andy Gard has made claim for the damage to the machines by fire under the insurance policy and Blackstone refuses to pay the claim for several reasons as set forth herein:
1. Andy Gard was not the owner of the machines.
This cannot be disputed. At all times legal title to the machines remained in H P M. But this was a bare legal title. All rights of H P M as Lessor had been assigned to Talcott, Inc. However, this does not foreclose recovery under other terms of the insuring agreement covering the property of others in the custody of the insured.
2. At the time of the fire loss the leases for the machines had been legally cancelled by Talcott, Inc. and Talcott, having given notice thereof, was legally entitled to possession.
Despite this notice of termination and demand for return Andy Gard did not return the machines. Even when action was taken to repossess the machines by Talcott's filing an Action of Replevin and posting a bond in double the value of the machines, Andy Gard retained possession of the machines under a claim of right by posting its counter-bond.
Under this situation Andy Gard was legally entitled to retain physical possession until the rights of the parties were finally determined.
It has been generally held that a defeasible title, the institution of proceedings to set aside title, judgments in foreclosure proceedings, or the institution of replevin proceedings are not sufficient to avoid insurance coverage of property in the possession of the insured. 43 Am.Jur.2d, Insurance Sec. 892, National Union Fire Ins. Co. v. Short, 32 F.2d 631 [6th Cir., 1929], Annot: 64 ALR 753. This has been particularly applied where judgment in replevin had been obtained by a conditional seller who did not actually take possession of the property. Midwest Metal Stamping Co. v. Citizens Fund Mutual Fire Ins. Co., 229 Iowa 969, 295 N.W. 444 Annot: 133 ALR 779. In that case the court held that under the conditional sales agreement the seller always had the right to retake possession of the property on default and that the replevin action and judgment therein did not relieve the buyer from the payment of the purchase price.
3. Defendant argues that the obligation of Andy Gard to keep the property insured was an obligation imposed by the lease-purchase contract and that such contract was terminated by Talcott, Inc. on its notice of default. Therefore, the continued possession of Andy Gard was at best a mere bailment imposing no obligation to insure. Under a bailment Andy Gard would have no liability to the ...