Spartan Iron & Metal Corp. v. Liberty Insurance

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
SPARTAN IRON & METAL
CORPORATION,
Plaintiff-Appellee,
No. 00-1694
v.
LIBERTY INSURANCE CORPORATION,
Defendant-Appellant.
Appeal from the United States District Court
for the District of South Carolina, at Spartanburg.
G. Ross Anderson, Jr., District Judge.
(CA-99-2575-7-13)
Submitted: March 13, 2001
Decided: March 28, 2001
Before WILKINSON, Chief Judge, and WILLIAMS
and MICHAEL, Circuit Judges.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
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COUNSEL
Paul W. Burke, Andrew C. Matteson, DREW, ECKL & FARNHAM,
L.L.C., Atlanta, Georgia, for Appellant. Michael B.T. Wilkes, Robert
E. Davis, THE WARD LAW FIRM, P.A., Spartanburg, South Caro-
lina, for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
Spartan Iron & Metal commenced a civil action against Liberty
Insurance to obtain payment under the second of two successive poli-
cies issued by Liberty for employee dishonesty. The district court
granted summary judgment in favor of Spartan Iron and Liberty
appealed. For the following reasons, we affirm.
I.
Liberty contracted to insure Spartan Iron against losses attributable
to employee dishonesty through two successive one-year policies
issued on October 1, 1996 and October 1, 1997, respectively. Each
policy was separately numbered, and Spartan Iron paid a single
annual premium for each.
During each of the policy years in question, a single employee stole
in excess of the $100,000 per-occurrence limit of insurance under the
policy then in effect. Spartan Iron accordingly filed a claim with Lib-
erty for $200,000, alleging losses totaling $100,000 or more under
each policy. Liberty tendered only $100,000, asserting that the acts in
question constituted a single occurrence as that term was defined in
the policies, and therefore Spartan Iron was entitled to recover only
under the first of those policies. Spartan Iron thereafter filed suit in
South Carolina for the claimed balance. Liberty removed the action
to federal court based on diversity jurisdiction pursuant to 28 U.S.C.
§ 1441(a) (1994).
This Court reviews a grant of summary judgment de novo, viewing
all facts and inferences in the light most favorable to the non-movant.
Food Lion, Inc. v. S.L. Nusbaum Ins. Agency, Inc., 202 F.3d 223, 227
(4th Cir. 2000). In this review, we remain mindful that "[s]ummary
judgment is appropriate where there is no genuine issue of material
2
fact, and the moving party is entitled to judgment as a matter of law."
Semple v. City of Moundsville, 195 F.3d 708, 712 (4th Cir. 1999) (cit-
ing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). Because it
is undisputed that Spartan Iron satisfied all conditions precedent to
payment for loss under the policies, and that Spartan Iron lost more
than $100,000 during each of the policy periods in question to the
same employee, the only issue to be decided is how the terms of those
policies, which are identical in all respects, are to be interpreted.
At the outset, we note that determining the extent of an insurer's
liability for losses spanning several years or successive policies is the
subject of a long and varied jurisprudence. See A.B.S. Clothing Col-
lection, Inc. v. Home Ins. Co., 41 Cal. Rptr. 2d 166, 168-69 (Ct. App.
1995); Penalosa Coop. Exch. v. Farmland Mut. Ins. Co., 789 P.2d
1196, 1200 (Kan. Ct. App. 1990). However, two approaches predomi-
nate. The first is to resolve the issue as a simple matter of contract
interpretation. See Omne Servs. Group, Inc. v. Hartford Ins. Co., 2 F.
Supp. 2d 714, 719 (E.D. Penn. 1998); Bethany Christian Church v.
Preferred Risk Mut. Ins. Co., 942 F. Supp. 330, 335 (S.D. Tex. 1996);
Reliance Ins. Co. v. Treasure Coast Travel Agency, Inc., 660 So. 2d
1136, 1137-38 (Fla. Dist. Ct. App. 1995). The second focuses primar-
ily on whether the parties intended coverage through one continuous
contract or a series of independent contracts. See Leonard v. Aetna
Cas. & Sur. Co., 80 F.2d 205, 206 (4th Cir. 1935); see also Karen
Kane Inc. v. Reliance Ins. Co., 202 F.3d 1180, 1186 (9th Cir. 2000);
Diamond Transp. System, Inc. v. Travelers Indem. Co. , 817 F. Supp.
710 (N.D. Ill. 1993); A.B.S., 41 Cal. Rptr. 2d at 168-69; Penalosa,
789 P.2d at 1200; Miami Springs v. Travelers Indem. Co., 365 So. 2d
1030, 1031 (Fla. Dist. Ct. App. 1979). We consider each in turn.
II.
A federal court sitting in diversity must apply the choice of law
rules of the state in which it is located. Klaxon Co. v. Stentor Elec.
Mfg. Co., 313 U.S. 487, 496 (1941). It is undisputed that the underly-
ing events triggering coverage under the policies occurred in South
Carolina. Accordingly, South Carolina substantive law must shape
our review of Liberty's policies with Spartan Iron. See Sangamo Wes-
ton, Inc. v. National Sur. Corp., 414 S.E.2d 127, 130-31 (S.C. 1992).
3
Under South Carolina law, ambiguities in a contract for insurance
are interpreted against the insurer. McPherson v. Michigan Mut. Ins.
Co., 426 S.E.2d 770, 771 (S.C. 1993). A term is ambiguous only
when it may fairly and reasonably be understood in more ways than
one. Jordan v. Security Group, Inc., 428 S.E.2d 705, 707 (S.C. 1993).
However, a court may not create an ambiguity where none exists. S.S.
Newell & Co. v. American Mut. Liab. Ins. Co., 19 S.E.2d 463, 467
(S.C. 1945). Nor may a court torture the meaning of policy language
to extend or defeat coverage that was never intended by the parties.
Torrington Co. v. Aetna Cas. & Sur. Co., 216 S.E.2d 547 (S.C. 1975).
Rather, a court must read the policy as a whole and consider the con-
text and subject matter of the insurance contract in an effort to discern
the parties' intention before declaring a term to be ambiguous. See
Yarborough v. Phoenix Mut. Life Ins. Co., 225 S.E.2d 344, 348-49
(S.C. 1976).
Under these guidelines, the definition of "occurrence" provided in
the Liberty policies is ambiguous. That definition provides: "Occur-
rence means all loss caused by, or involving, one or more ``employ-
ees,' whether the result of a single act or series of acts." However, the
definition does not affirmatively indicate whether a series of acts
includes acts occurring outside the policy term. Other courts address-
ing this issue have found identical definitions of occurrence to be
ambiguous on this point. See Karen Kane, 202 F.3d at 1185, 1186-88(finding, as the district court did here, that other policy terms indi-
cated that the definition of occurrence was temporally limited to the
policy term); A.B.S., 41 Cal. Rptr. 2d at 174. As a result, the defini-
tion of occurrence presented here may fairly and reasonably be said
to be ambiguous.
The cases supporting Liberty's construction of the definition of
occurrence are readily distinguishable. Many of those cases turn on
a common law definition of occurrence originally applied in this con-
text in Appalachian Insurance Co. v. Liberty Mutual Insurance Co.,
676 F.2d 56, 61 (3d Cir. 1982). However, courts adopting the Appala-
chian Insurance definition have done so in the apparent absence of a
relevant definition in the policies themselves. See PECO Energy Co.
v. Boden, 64 F.3d 852, 856 (3d Cir. 1995); Business Interiors, Inc. v.
Aetna Cas. & Sur. Co., 751 F.2d 361, 362-63 (10th Cir. 1984). To
adopt a common law definition here where the policies provide a con-
4
tractual definition would be at odds with South Carolina law. See Yar-
borough, 225 S.E.2d at 348-49 (stating that ambiguous terms should
be considered in light of the rest of the policy); Green v. United Ins.
Co. of Am., 254 S.C. 202, 174 S.E.2d 400 (1970) (stating that unde-
fined terms in a contract should be given their"usual and ordinary"
meaning). Accordingly, we decline to resolve the ambiguity in the
definition of occurrence by incorporating the interpretation of occur-
rence of Appalachian Insurance and its progeny.*
Consideration of additional policy terms does not ameliorate this
ambiguity in the definition of occurrence. Liberty's policies contain
two boilerplate terms that are often considered in this context. The
first is the Prior Insurance provision of Condition 9, which states that
If any loss is covered:
a. Partly by this insurance; and
b. Partly by any prior cancelled or terminated
insurance that [Liberty] or any affiliate had
issued to you or any predecessor in interest;
the most [Liberty] will pay is the larger of the amount
recoverable under this insurance or the prior insurance.
Courts considering this term in materially identical factual contexts
have alternatively found it to be ambiguous or dispositive of the issue
at bar. See Karen Kane, 202 F.3d at 1185, A.B.S., 41 Cal. Rptr. 2d at
171-73; but see Diamond Transp., 817 F. Supp. at 712; Treasure
Coast, 660 So. 2d at 1138. These varied interpretations of identical
_________________________________________________________________
*Liberty cites a second line of cases beginning with Diamond Transp.
Sys., Inc. v. Travelers Indem. Co., 817 F. Supp. 710, 712 (N.D. Ill. 1993),
in support of its construction that the definition of occurrence unambigu-
ously intends to include acts occurring beyond the policy period. 817 F.
Supp. at 712; see also Bethany Christian Church v. Preferred Risk Mut.
Ins. Co., 942 F. Supp. 330, 334 (S.D. Tex. 1996), citing Potomac Ins.
Co. of Ill. v. Lone Star Web, Inc., 1994 WL 494784 (N.D. Tex. July 21,
1994). For reasons explained below, these cases are either distinguish-
able or insufficient to persuade us to adopt Liberty's construction.
5
contract language indicate that this term is fairly amenable to more
than one reasonable construction, and therefore is ambiguous as well.
See Jordan, 428 S.E.2d at 707.
The second provision to be considered is the Non-Cumulation pro-
vision of Condition 10. This term states that
Regardless of the number of years this insurance remains in
force or the number of premiums paid, no Limit of Insur-
ance cumulates from year to year or period to period.
As with Condition 9, courts considering terms identical to Condition
10 in the context of a course of employee dishonesty that extends over
successive policies have found it to be ambiguous as to the issue of
an insurer's liability under each of those successive policies. See
A.B.S., 41 Cal. Rptr. 2d at 171-73; Miami Springs, 365 So. 2d at 1031.
Accordingly, Condition 10 may fairly and reasonably be said to be
ambiguous as to that point as well. Jordan, 428 S.E.2d at 707.
Although it is a close question, our review of the policies indicates
that the definition of occurrence and the relevant policy terms are
independently and collectively ambiguous as to whether a loss contin-
uing over successive policies was intended to be covered under every
policy in effect during the time span in which the employee dishon-
esty occurred or only the first of those policies. As a result, the
ambiguity on this issue requires that it be resolved in favor of the
insured, Spartan Iron.
III.
We reach the same result in applying the approach of the line of
cases that address the issue of an insurer's liability for employee dis-
honesty over several years on the basis of whether or not the coverage
in question was provided by means of one continuous policy or a
series of successive and independent policies. Our review of the Lib-
erty policies indicates they were intended as separate and independent
contracts, in that each required a separate, single annual premium to
be paid at its "inception." This interpretation is supported by two pro-
visions in the Liberty policies.
6
The first such provision is almost identical to the term addressed
in Diamond Transp. Sys., Inc. v. Travelers Indem. Co., 817 F. Supp.
710 (N.D. Ill. 1993). Central to that court's finding in favor of the
insurer was its conclusion that only one of the series of policies at
issue remained in effect as coverage for the years in question. The
court reached this conclusion based on the presence of the following
term as quoted by that court:
3. CANCELLATION OF PRIOR INSURANCE: By accep-
tance of this Coverage Part, you give us notice canceling
prior policy/bond numbers, the cancellation to be effective
at the time this Coverage Part becomes effective.
817 F. Supp. at 711. However, the corresponding Cancellation of
Prior Insurance provision in the Declarations Form of the Liberty pol-
icies at issue in this appeal contains a colon after the word "numbers"
and a space, indicating that the contracting parties are to specify
which, if any, prior policies or bonds are to be canceled. Because no
policy numbers were identified in the corresponding provision of
either policy, it is reasonable to conclude that the parties intended to
leave the prior policies open as independent avenues for recovery for
acts occurring during their corresponding policy periods. Under this
interpretation, Spartan Iron is entitled to recover under each policy in
effect during the employee dishonesty in question.
This construction of the Liberty policies is also supported by Con-
dition 13(b). The district court below noted that Condition 13(b) of
the policies provides that Liberty is liable only for "loss [sustained]
through acts committed or events occurring during the Policy Period."
Spartan Iron & Metal v. Liberty Ins., 99-CV-2575 (D.S.C. April 25,
2000). The district court concluded that this provision has the effect
of severing the series of acts constituting an occurrence at the termi-
nation date of a policy, thereby permitting recovery under successive
policies as the acts of employee misconduct continued. See id., citing
Penalosa, 789 P.2d at 1199-200. We agree that this language supports
the argument that Liberty's policies with Spartan Iron were intended
as successive and independent one-year contracts for coverage, and
thus that the policy terms, including the definition of occurrence,
should be construed accordingly to allow recovery under each of the
policies issued to Spartan Iron.
7
On appeal, Liberty argues that Conditions 9 and 10 unambiguously
indicate its intent to limit its liability, even under successive contracts,
for any single employee's acts of dishonesty to the limit of insurance
available when the acts began. In support, Liberty relies on Reliance
Ins. Co. v. Treasure Coast Travel Agency, Inc., 660 So. 2d 1136 (Fla.
Dist. Ct. App. 1995). However, that court did not consider whether
the policies in question were part of one continuous coverage or sepa-
rate policies in reaching its decision. Id. at 1137-39. Additionally, nei-
ther the policy before that court nor the policy considered in Diamond
Transportation contained a condition similar to Condition 13(b).
Moreover, two courts that have considered policies with terms identi-
cal in all respects to the policy in Treasure Coast and those issued by
Liberty to Spartan Iron have arrived at conclusions contrary to that
reached in Treasure Coast. See Karen Kane, 202 F.3d at 1138; A.B.S.,
41 Cal. Rptr. 2d at 170-73. Accordingly, we find Liberty's contention
unpersuasive.
Our review of Liberty's policies indicates that while they may be
read to limit Liberty's liability in the manner it suggests, such an
interpretation is not compelled. In light of the absence of clear and
unambiguous language to the contrary, the coverage extended by Lib-
erty to Spartan Iron is properly construed as being provided through
successive and independent contracts for insurance. Accordingly,
Spartan Iron may recover up to the limit of insurance under each pol-
icy in effect during the time the employee dishonesty in question took
place. Karen Kane, 202 F.3d at 1184, quoting A.B.S., 41 Cal. Rptr.
2d at 168-69 ("Where indemnity is afforded through separate and dis-
tinct contracts for specific policy periods the insurer is generally held
liable up to its limit of liability for each policy period.").
IV.
In summary, although the question of coverage is a close one, we
find that the definition of "occurrence" in Liberty's policies is ambig-
uous, and that it is not clear that the two polices issued to Spartan Iron
should be construed as one continuous policy rather than separate and
independent contracts. Accordingly, we are not persuaded that Liberty
has limited its liability for any one employee's related acts of dishon-
esty to the coverage provided by a single policy. As a result, Spartan
Iron was properly entitled to judgment as a matter of law. Accord-
8
ingly, we affirm the district court's order granting summary judgment
in favor of Spartan Iron.
AFFIRMED
9