decided: June 1, 1971.
RITTENHOUSE FOUNDATION, INC., APPELLANT,
LLOYD'S LONDON ET AL., APPELLANTS
Appeals from judgments of Court of Common Pleas, Trial Division, of Philadelphia, Dec. T., 1962, No. 4085, in case of Rittenhouse Foundation, Inc. v. Lloyd's, London et al.
Bernard Chanin, with him Donald K. Joseph, Bernard M. Borish, and Wolf, Block, Schorr & Solis-Cohen, for defendants.
Richardson Dilworth, with him, Jacob Kalish, and Dilworth, Paxson, Kalish, Kohn and Levy, for plaintiff.
Bell, C. J., Jones, Cohen, Eagen, O'Brien, Roberts and Pomeroy, JJ. Opinion by Mr. Justice Pomeroy. Mr. Justice Cohen took no part in the decision of this case.
[ 443 Pa. Page 163]
These appeals present the question of the extent, if any, of the liability of Lloyd's of London ("Lloyd's"), as insurers against loss by fire, to Rittenhouse Foundation, Inc. ("Rittenhouse"), whose building in Philadelphia was almost completely destroyed by fire in 1962. Two contracts of insurance had been issued, one in the face amount of $230,000, and the other in the amount of $68,500. After a non-jury trial, the court below held (1) that the larger policy was in force and effect on the date of the loss, and that the defendant insurers were liable thereon, and (2) that the smaller policy was not in force or effect on the date of the loss, and that the insurers were not liable thereon. A verdict was entered accordingly. Exceptions to findings and conclusions were filed by both parties, and in all material respects were dismissed by the court en banc, one judge dissenting. Both parties have appealed.
The facts, while involved, are not in dispute. In essential respects they are as follows: Rittenhouse was required under the terms of a purchase money mortgage covering the premises in question to maintain fire insurance in the aggregate face amount of $350,000. In partial discharge of this undertaking it purchased, effective June 27, 1961, $60,000 of insurance from Insurance Company of North America ("I.N.A."), $30,000 from Fidelity Phenix Insurance Company ("Fidelity-Phenix") and $30,000 from Newark Insurance Company
[ 443 Pa. Page 164]
("Newark").*fn1 The balance of $230,000 was sought and obtained from underwriters at Lloyd's, the underwriting being evidenced by two "cover notes" issued by Stewart, Smith (Pennsylvania) Inc. ("Stewart, Smith"), brokers for Lloyd's.*fn2 Of paramount importance in the matter before us is the following language contained in both cover notes issued to Rittenhouse by Lloyd's: "Warranted same terms and conditions as and to follow the settlements of Insurance Company of North America,*fn3 and that said company has, at the time
[ 443 Pa. Page 165]
of any loss, and at the same gross rate, at least $60,000 (subject only to reduction by amount of any loss not reinstated) on the identical subject matter and risk, and in identically the same proportion on each separate part thereof. This policy is subject without notice to the same conditions, endorsements, assignments and alterations of rates as are, or may be assumed in the above-mentioned Company's Insurance upon which this policy is based and shall be deemed to include such risks of Lightning and/or Explosion as are included in that Insurance." For ease of reference these two paragraphs will be referred to as the "warranty clause".
Early in April, 1962, Rittenhouse's agent was advised that INA proposed to cancel its $60,000 policy. Since INA was Lloyd's "warranty company", the Rittenhouse agent promptly requested the broker, Stewart, Smith, to have Fidelity Phenix or Newark substituted as the warranty insurance company. At this time it was recognized in conversation between the broker and Rittenhouse's representative that INA's cancellation would immediately result in Lloyd's being off the risk if no substitute warranty company were secured. Lloyd's notified Stewart, Smith by cable that they wished to follow INA and therefore considered themselves off the risk as of April 5, 1962.*fn4 By formal written notice received by Rittenhouse on May 22, 1962, INA cancelled its policy, effective June 2, 1962. Lloyd's never gave written notice of cancellation to Rittenhouse, the only evidence of their intention being the above mentioned cable to the broker, Stewart, Smith; neither did they tender a return of premium.
[ 443 Pa. Page 166]
On July 7, 1962, occurred the fire which virtually destroyed the building in question.
Three days later, on July 10, 1962, two new cover notes totaling $68,500 were issued to Rittenhouse by Stewart, Smith on behalf of a second underwriting group at Lloyd's (hereinafter "Lloyd's Group II"). These cover notes stated the effective dates of coverage to be from April 5, 1962 to April 5, 1963 and designated Fidelity-Phenix (instead of INA) as the underlying warranty company, said company to have at least $30,000 coverage on the same subject matter and risk a the time of any loss. In all other respects the Lloyd's Group II cover notes were identical to those issued by the original Lloyd's group. On the face of these notes a space entitled "Previous No." was completed with the numbers of the cover notes issued by the original Lloyd's underwriters.
Rittenhouse contends that Lloyd's are bound because they never cancelled their insurance by any notice to Rittenhouse, that the cancellation of the INA policy did not automatically terminate Lloyd's commitment under their original cover notes, and that the issuance of the Lloyd's Group II policy (cover notes) was not an effective replacement of or substitution for their original undertaking. Lloyd's argument, in brief, is that its original cover notes were conditioned upon coverage of at least $60,000 by INA at the time of the loss, and that the cancellation of the INA policy prior to the loss automatically terminated Lloyd's liability on its original cover notes. We agree with Lloyd's position, and are therefore constrained to reverse.
The resolution of this dispute lies in the interpretation of the warranty clause in the Lloyd's cover notes; specifically the following language: "Warranted same terms and conditions as and to follow the settlements of Insurance Company of North America, and that said company has at the time of any loss, . . . at least
[ 443 Pa. Page 167]
$60,000 . . . on the same identical subject matter and risk. . . ." This mode of expression is undoubtedly telegraphic, but it is clear and unambiguous as far as the problem before us is concerned. The Lloyd's undertaking to the insured, not evidenced by any separate Lloyd's policy, was completely "geared into" co-insurance furnished by INA which the application to Lloyd's had designated as the "warranty company". That undertaking was to be on the same terms and conditions as the insurance issued by INA; settlement by Lloyd's of any claim was to be on the same basis as an INA settlement; and insurance issued by INA in the sum of at least $60,000 on the same subject matter and risk was required to be in existence at the time of any loss. The latter requirement was clearly a condition precedent to any liability on Lloyd's part; indeed the preceding two aspects of the Lloyd's insurance -- those relating to terms and to settlement -- were meaningless without the existing of the INA policy to which they refer. Since the condition precedent was admittedly not met, there could be no liability on the part of Lloyd's. The fact that it gave no independent notice of cancellation to Rittenhouse or its authorized agent is immaterial; it was automatically off the risk pursuant to the INA notice.*fn5
The exact clause before us has not been previously construed in Pennsylvania, but it is neither new nor
[ 443 Pa. Page 168]
uncommon, and has been before courts in other jurisdictions. A case substantially the same as that at bar is National Factors, Inc. v. Holford, 27 App. Div. 2d 377, 279 N.Y.S. 2d 470 (1967). There, as here, the lead company cancelled; there, as here, Lloyd's terminated its co-insurance, but no notice thereof was conveyed to the insured. The court held that the Lloyd's policy "became inoperative and void by its own terms". The requirement of the continued maintenance of the underlying co-insurance was held to be "reasonable, consistent, a condition precedent, not antagonistic to the mortgage clause. . . ."
The enforceability of the clause was similarly upheld in Romanos v. Home Ins. Co., 355 Mass. 499, 246 N.E. 2d 173 (1969). In that case want of diligence in presenting a claim of loss was held to bar recovery against the primary carrier, and by the same token to relieve Lloyd's of liability. Relying on the decisions in Barnard v. Faber, 1 Q.B. 340 (1892) and Beauchamp v. Faber, 14 T.L.R. 544 (1898), the court held that the purpose of the warranty clause was to require concurrency of coverage, and that compliance with the warranty was a condition precedent to recovery. See also Millers' Nat. Ins. Co. v. Wichita Flour Mills Co., 257 F. 2d 93, 104 (C.A. 10th, 1958); Federal Intermediate Credit Bank v. Globe and Rutgers Fire Ins. Co., 7 Fed. Supp. 56 (D. Md., 1934).*fn6
The holdings of these cases construing the so-called warranty clause as being an expression of conditions
[ 443 Pa. Page 169]
under which the insurer assumes the risk is in line with the usual interpretation of insurance contracts. As Williston observes, "[a] contract of insurance is normally a unilateral contract . . . most of the so-called warranties in insurance policies are not even promises in form, but are conditions. The use of the word 'warranty', therefore, in insurance law is a misnomer. It means a condition inserted on the face of the policy or a statement of fact, on the exact truth or performance of which, unless excused, the duty of immediate performance of the insurer's promise depends." 5 Williston on Contracts, § 673 (3d ed., 1961).
This is not a case, as Rittenhouse argues, where the breach of a warranty as to existence of a future act or fact is of no materiality with respect to the risk insured against, and so will not be a bar to recovery. See, e.g., Pugh v. Commonwealth Mutual Fire Ins. Co. of Pa., 195 F. 2d 83 (C.A. 3d, 1952);*fn7 Diesinger v. American & Foreign Ins. Co., 138 F. 2d 91 (C.A. 3d, 1943); Karp v. Fidelity-Phenix Fire Ins. Co., 134 Pa. Superior Ct. 514, 4 A.2d 529 (1939).*fn8 Here the condition
[ 443 Pa. Page 170]
of existing INA co-insurance at the time of a loss was a sine qua non of the existence of any Lloyd's contract at the time of loss. We never reach the situation, dealt with in the cited cases, where the breach of a promissory warranty must be appraised in terms of materiality to the risk insured against.
We turn, in conclusion, to the second claim against Lloyd's put forward by Rittenhouse, the cover notes issued by Lloyd's Group II in the amount of $68,500, with Fidelity-Phenix as the lead or warranty carrier. As to these Lloyd's interposes no defense, and in effect concedes liability. Although dated and delivered July 10, 1962, three days after the fire, these cover notes were negotiated in May, 1962 and were stated to be for the period April 5, 1962 to April 5, 1963.*fn9 The undertaking was thus in force on the date of loss, and the only question is the extent of the liability.
The warranty clause on the Lloyd's Group II contracts, like the original ones, provided: "Warranted same terms and conditions as and to follow the settlements of" Fidelity-Phenix. The term "follow" is imprecise. Two of its meanings are given in Webster's Third International Dictionary (1965) as "to come after" or "to copy after". We accept these definitions as apposite to the clause under consideration. We thus find "to follow" to mean both to come after in time and to be of the same nature. See Romanos v. Home Ins. Co., supra; Beauchamp v. Faber, supra. Accordingly, since Fidelity-Phenix settled the claim against it for two-thirds the face value of its contract, Lloyd's Group II are liable for two-thirds of their $68,500
[ 443 Pa. Page 171]
undertaking. The question of actual cash value, reproduction cost and fair market value which were litigated as to Lloyd's INA note are not here important or relevant.
The judgments of the Court of Common Pleas are reversed. Judgment is here entered in favor of appellant Lloyd's in the appeal at No. 256, and judgment is here entered in favor of appellant Rittenhouse in the appeal at No. 365 in the sum of $45,666.66 with interest from the date of demand.
Judgments of the lower court reversed.