Sanders v. Frankfort Marine, Accident & Plate Glass Insurance

The plaintiff has recovered judgment against the defendant Paper Company for some $9,000. The Paper Company have not paid the judgment and have no property upon which a levy can be made, but they hold a policy of insurance issued by the defendant Insurance Company covering their liability for the injury which constituted the plaintiff's cause of action, to the extent of $5,000.

The obligations imposed upon the insurer by the policy contract are in dispute. The plaintiff claims it constitutes upon the facts a subsisting obligation upon the Insurance Company to pay $5,000 to the Paper Company, and he contends that upon equitable grounds the money should be paid to him. The Paper Company, so far as appears, make no claim to the money, nor do they object to a payment to the plaintiff. If the Insurance Company are under an existing obligation to pay $5,000, it is immaterial to them whether they pay it to the Paper Company or to the plaintiff. The Paper Company cannot object to a decree for a payment of the money to the plaintiff in discharge pro tanto of his judgment against them, for thereby they are relieved from loss or discharged from liability to that amount, which is all they can claim under any construction of the policy. The Insurance Company concede the validity of the policy, that it covers the injury for which the Paper Company have been found liable, and that the amount of such liability has been judicially determined to be greater than the total claim under the policy. Their position is, that as the Paper Company have paid nothing they have lost nothing, and the contingency upon which the liability of the Insurance Company was made to depend by the terms of the policy has not yet occurred. They rely upon the grant or covenant of the policy by which they "agree to indemnify . . . against loss from . . . liability for damages on account of bodily injuries, fatal or non-fatal, accidentally suffered by any person . . . and resulting from negligence of the assured," and the further agreement or condition in clause 8: "No action shall lie against the company as respects any loss under this policy unless it shall be brought by the assured himself to reimburse him for loss actually sustained and paid by him in satisfaction of a judgment after trial of the issue." Under these provisions, the Insurance Company claim that the only legal obligation resting upon them is to pay to the Paper Company such sum as may have been paid by the insured upon a judgment recovered upon the liability covered by the policy. Two cases similar to the present are cited in which this contention appears to have been adopted upon a similar policy: Frye v. Company, 97 Me. 241, and Travellers Ins. Co. v. Moses, 63 N.J. Eq. 260. In the last case, in an earlier decision in the court of chancery, it was held that equity would apply the whole indemnity to the satisfaction of the plaintiff's judgment. Beacon Lamp Co. v. Insurance Co., 61 N.J. Eq. 59. This view was not followed in the court of appeals, which limited the amount so applied to a sum which the court by a process of reasoning construed had been paid. Travellers Ins. Co. v. Moses, supra. In Bain v. Atkins, 181 Mass. 240, which has also been cited by the defendants, the obligation of the insurance company had been performed. The question of the plaintiff's equitable right to compel the application of a subsisting obligation to indemnify against his claim to its satisfaction was not in the case and was expressly excluded from consideration (p. 243).

Discussion has been had of the question whether the present contract was one of insurance against damage or of insurance against liability. In the following cases cited by the plaintiff the policies in question were held to be contracts of indemnity against liability: Fritchie v. Company, 197 Pa. St. 401; Hoven v. Company, 93 Wis. 201; Anoka Lumber Co. v. Company,63 Minn. 286; American etc. Co. v. Fordyce, 62 Ark. 562; Fidelity etc. Co. v. Fordyce, 64 Ark. 174; Fenton v. Company,36 Or. 283. The phraseology of the agreement or covenant in the policy before the court differs materially from that of the policies construed in those cases. The decisions, therefore, are not directly in point.

If it be conceded that the contract is one of indemnity against damage merely, the question presented would not be whether an action at law is now maintainable by either the plaintiff or the Paper Company, but whether there is power in equity to grant the relief asked. But whether such power exists or not, the indemnitor has the right to perform his contract of indemnity by payment of the claim indemnified against. He may also, if he deems it necessary, stipulate for the right to perform the contract in this way, and may also agree that he will so perform it. If there be any uncertainty as to the right of a creditor to claim payment in equity of one who has agreed to indemnify the debtor against his claim, there is no doubt of his right to do so against one who has assumed the debt or agreed to pay the claim. An agreement to assume a debt is a promise to pay it as the promisor's own debt. Locke v. Homer, 131 Mass. 93, 109. "If one person agrees with another to be primarily liable for a debt due from that other to a third person, so that as between the parties to the agreement the first is the principal and the second the surety, the creditor of such surety is entitled, in equity, to be substituted in his place for the purpose of compelling such principal to pay the debt." Keller v. Ashford,133 U.S. 610, 623. If the Insurance Company, by force of the policy and the plaintiff's loss, are now indebted to the Paper Company, it is plainly equitable that such indebtedness should be applied to the satisfaction of the plaintiff's claim. It is equally clear that equity has power to make such application. Hunt v. Association, 68 N.H. 305. See, also, First Nat'l Bank v. Hunton,70 N.H. 224; Barton v. Croydon, 63 N.H. 417; Holt v. Bank, 62 N.H. 551; Gerrish v. Gerrish, 62 N.H. 397; Keene etc. Bank v. Herrick, 62 N.H. 174.

These propositions do not appear to be seriously controverted; but the contention is, as has already been suggested, (1) that the insurers have not agreed to discharge the liability, and hence have not assumed the claim, and (2) that they do not now owe the Paper Company anything. The question for investigation is, therefore, the meaning of the policy contract; and if the converse of either contention is sustained, the plaintiff is entitled to relief.

In addition to the provisions of the policy to which reference has been made and upon which the defendant Insurance Company rely, and which are similar to those upon which the decisions in Maine and New Jersey are founded, the policy contains the following "general agreements, which are to be construed as coordinate" with the general covenant of the policy:

"2. If thereafter any suit is brought against the assured to enforce a claim for damages on account of an accident covered by this policy, immediate notice thereof shall be given to the company and the company will defend against such proceedings, in the name and on behalf of the assured, or settle the same at its own cost, unless it shall elect to pay to the assured the indemnity provided for in clause A [$5,000].

"3. The assured shall not settle any claim, except at his own cost, nor incur any expense, nor interfere in any negotiation for settlement or in any legal proceeding without the consent of the company previously given in writing . . . . The assured when requested by the company shall aid in securing evidence and in effecting settlements."

Whether the contracts considered in the Maine and New Jersey cases contained similar stipulations does not appear from the reports of the cases. It is probable that like provisions were contained in these policies, but in neither of these cases is there any discussion or reference to such stipulations as a part of the contract. They stand in the policy at the head of the "general agreements" of which clause 8 is one, and are of course of equal force in modifying or explaining the covenant of which they "are to be construed as co-ordinate, as conditions." In Anoka Lumber Co. v. Company, 63 Minn. 286, — 30 L.R.A. 689, Hoven v. Company,93 Wis. 201, — 32 L.R.A. 388, and Fenton v. Company, 36 Or. 283, — 48 L.R.A. 770, similar provisions are considered as furnishing evidence that the contract was one of indemnity against liability. In the case first cited, the court sustain their conclusion, that the contract is one of indemnity against liability, in part as follows: "The company takes upon itself the settlement of loss and the control of all legal proceedings, and the assured is forbidden to settle any claim or incur any expense without its consent in writing . . . . If the plaintiff is forbidden to settle a claim for an accident of this kind, we fail to see how it is imperative upon him to pay a judgment rendered against him upon such a claim, as a condition precedent to his right of recovery. The Insurance Company, by the terms of its own policy, has taken into its own hands the whole machinery for settling such claim, and will not allow the employer to do it." In Hoven v. Company, the court say: "Again, by one of the conditions, the Insurance Company assumes entire charge and responsibility for the settlement of the loss and of any legal proceedings, and for the payment of the costs thereof. There is no way provided by which it can be relieved of its liability, except by actual payment to the employer of the full amount for which it could in any event become liable." It is further said in the same opinion that this provision with others is "inconsistent with any reasonable theory other than that the contract of insurance is one of indemnity against liability." The provisions in the present policy are, if anything, more stringent and particular in prescribing the obligations assumed by the Insurance Company than the reports of the cases cited indicate that they were in those cases. While from the different language used in the general covenant these cases are not, as already stated, authority for the position that the policy in this suit is a policy of indemnity against liability generally, yet they are authority for the proposition that these provisions are consistent with an intention to assume the liability. By these stipulations, the insurers not only reserve the right to perform their contract of indemnity in a particular way, but agree that they will so perform it.

They agree that upon notice of a suit brought to enforce a claim for damages on account of an accident covered by the policy they will do one of two things: They will (1) defend against the proceedings in the name and on behalf of the assured, or (2) settle the same at their own cost, unless they elect to pay the full amount of the indemnity to the assured. This is an agreement, in performance of their contract of indemnity, (1) to defend, (2) to settle, or (3) to pay the assured. The last two plainly provide for the performance of the contract of indemnity before the assured has suffered loss, in the sense of having been compelled by legal proceedings to pay damages. So far as the agreement to defend involves the relief of the assured from the expense of such litigation, that agreement also involves the performance of the: contract of indemnity by the assumption of the liability indemnified against. The sole question, therefore, is whether by the agreement to defend against the proceedings the insurers also agree to perform their contract by the assumption of the entire liability, within the limits of the contract, in cases where they have assumed the defence.

If "to defend" means "to protect, to secure against attack," — in short, to successfully defend, — it is perfectly clear that the Insurance Company agree to perform their covenant of indemnity against loss by assuming the liability. This is conceded. But it is claimed that the agreement to defend against the proceedings means merely to contest the suit to final judgment. While in a technical sense to defend a suit is to contest it, the word "defend" also includes the broader meanings above suggested. Web. Dict. If the meaning were, as is claimed, merely the conduct of the litigation until judgment should be rendered, no reason has been suggested why the purpose was not explicitly stated. Having entered upon the defence of the suit, no way is perceived by which (at least, before judgment) the Insurance Company could escape liability, except by settlement with the plaintiff or payment to the assured. The engagement is not merely to contest the suit to judgment, but to "defend against such proceedings," — meaning, necessarily, all the proceedings in the suit founded upon the claim for damages against the insured. The judgment is a proceeding in such a suit, as also is the execution. After final judgment, payment is ordinarily the only defence open which will defeat further progress in the proceedings — the issuance of execution.

In this case there has been execution upon which the Paper Company's property has been sold. That the amount of the sale was nominal is immaterial. The fact discloses the abandonment of defence by the Insurance Company, their failure to settle the claim, and hence their liability to pay the insured the amount of the indemnity provided, unless it be established that the rendition of the judgment excuses the Insurance Company from further defence of the proceedings. Further evidence to the contrary to be found in the provisions of the contract that the assured shall not settle any claim except at his own cost, nor interfere in any negotiation for settlement or in any legal proceeding. The substance of these provisions is, that after notice of the suit to the insurer, unless the company pay him the indemnity, the assured's control over the matter ceases; he cannot settle the claim, nor can he conduct or direct the litigation. If the company settle or defeat the claim, the liability under which he labors is assumed and discharged by the insurer. In every possible event except the defeat of their effort to prevent judgment against the insured, the company agree to perform their contract without the previous, payment of anything by the insured. If an exception were intended in this case, it seems probable that it would be plainly stated, or some good reason would be apparent for the different undertaking. None is perceived.

The Insurance Company alone are responsible for the conduct of the suit and for the failure to adjust the claim before judgment. If the intent was that the assured should assume the settlement of the claim when judgment was ordered, it is at least probable that the clause by which he was prohibited from settling any claim or interfering in any legal proceeding would have been limited by the insertion of the words "before final judgment." In the absence of such limitation of this prohibition, or of an express limitation of the agreement to defend, it is reasonable to infer that an express provision to that effect would have been inserted if the parties understood that after the Insurance Company had conducted the suit to judgment they should then stand aside and call in the assured and require him to advance money to pay the verdict, which they would instantly be required to repay to him.

If a correct construction of clause 8 is that the only obligation of the company is to reimburse the insured for money paid to satisfy a judgment obtained against him, there would seem to be a contradiction in terms. The insured's loss from the liability insured against, if he defends the suit himself, would consist of the amount of the judgment and the expense of contesting the claim. Ross v. Company, 56 N.J. Eq. 41. Having agreed upon an indemnity against all loss, and having especially agreed that the insured should be relieved of all expense of contesting legal proceedings, it is not probable that the parties understood that the performance of this part of the agreement should be dependent upon the caprice of the Insurance Company, without legal remedy to the insured for its non-performance. Neither is it probable that it would have been thought necessary to make the payment of indemnity dependent upon a trial of the issue, when the insurer had in fact tried the issue. Whether the provisions of a contract are reasonable or unreasonable, — whether the engagements into which the parties have entered are such as would probably be made in like circumstances, — is, as the defendants claim, immaterial when the agreement of the parties is one which they have power to make and is declared in plain unmistakable language. But when the evidence of the agreement furnished by the written contract is not plain and unmistakable, but is open to more than one interpretation, the reasonableness of one meaning as compared with the other, and the probability that men in the circumstances of the parties would enter into one agreement or the other, is competent for consideration on the question what the agreement was which the written contract establishes. Kendall v. Green, 67 N.H. 557. The substance of clauses 2 and 3 is, that upon notice of legal proceedings founded upon an accident covered by the policy the Insurance Company will take over the management of the suit, assume and discharge the risk, reserving the right at any time to terminate the liability by the payment of the indemnity or such part of it as they might agree upon with the assured, as was done in Bain v. Atkins,181 Mass. 240. These clauses apply only upon a loss covered by the policy. If the company proceeded thereunder, they might be estopped to deny their liability. Glen Falls etc. Co. v. Insurance Co., 11 N.Y. App. Div. 411.

The purpose and meaning of clause 8 is apparent upon consideration of the situation which the parties must have contemplated as a probable result of their engagements. It is not probable that the parties contemplated and attempted to provide for the contingency of a suit between themselves upon a claim as to which the liability of the Insurance Company was conceded. An inspection of the policy, which is made a part of the case, discloses a "special agreement" B and "general agreements" 4 and 5, to the effect that the policy does not cover certain accidental injuries for which the insured might become liable. Whether the policy covered a particular accident, was a question as to which it could be foreseen controversy might arise. It was therefore within the contemplation of the parties that a suit might be brought against the insured for accidental injuries not covered by the policy. No claim except for immediate surgical relief could accrue against the company without notice of a suit. Upon the receipt of such notice, the company was called upon to recognize or deny liability. If they denied their liability, and refused to perform their contract of indemnity in the manner specified in clause 2, such decision would not be binding upon the assured; and in a controversy between the parties, the assumption of the defence by the company might be considered to be an admission of liability under the policy. There was no reason why they should defend if not liable. The purpose of clause 8 was, therefore, to provide for the cases, if any should arise, where the company contended the claim arose from an accident not covered by the policy. It was intended to limit the liability of the company to damages ascertained by due course of judicial procedure in cases where they could not conduct the defence without waiving their claim that they were not liable, and as to which, if not liable, they were under no obligation to incur any expense. Its purpose was to prevent collusion between the plaintiff and the assured.

In this case the Insurance Company undertook the investigation of the case, and after suit was brought assumed the entire defence by their counsel and conducted the same to final judgment. The present action is not one respecting a loss by the insured under the policy. The defendants' contention that the assured have lost nothing because they have paid nothing may, so far as the case is concerned, be conceded. The proceeding is not even to enforce the agreement of the policy to assume the liability; but the plaintiff's case stands upon the legal result of the assumption of liability by the company. Because they assumed — in legal effect agreed to pay — the assured's liability to this plaintiff to the extent of $5,000, equity requires them to perform their agreement by payment to him. It may also be conceded, though it cannot be decided in this case, that if the insurers had denied liability for any claim arising out of the plaintiff's injury, or had refused to take charge of the suit, no action could have been maintained against them except by the assured upon payment of a judgment after a trial of the issue. The defendants' construction of the policy may to this extent be correct, but it has no application to the present case.

Counsel for the Insurance Company, in their brief, reach the conclusion that clause 8 does not prevent an action by the assured for breach of the agreement to defend. It is immaterial whether this conclusion is best founded upon a definition of the word "loss," — upon whether it means "claim for damages" merely, or both that and the cost of litigation, — or upon the ground that the contract cannot be understood at the same time to give a right and prohibit its enforcement. It is sufficient that on one ground or the other clause 8 cannot be construed to prohibit an action for a breach of the contract to defend. If it does not, neither does it prohibit an action for breach of the engagements to settle or pay the indemnity to the assured contained in the same clause. If none of these engagements have been performed, the existence of a subsisting obligation on the part of the Insurance Company is established.

The defendants urge that there is a greater risk of unfavorable verdicts and of greater verdicts in suits like the plaintiff's against the Paper Company when the defendant is insolvent and not a going concern, and that the policy was intended to protect against this risk by providing that there should be no liability for any policy-holder who was unable to pay the judgment. The difficulty with this argument is that it is not the inability to make payment, but the non-payment, which the construction claimed would make material. If it was intended that insolvency at the time of the trial should avoid the policy, a provision to that effect could easily have been inserted.

The insurers chose to protect themselves from that class of business by declining it, instead of providing for the contingency in the policy, or adjusting the premiums charged with reference thereto. The insolvency which prevents payment is insolvency after judgment, and not during the trial, and might, as was the case in Bain v. Atkins, 181 Mass. 240, be produced by the judgment itself. It does not necessarily follow that because an insured was insolvent he could not arrange for a payment of such a claim. The provision would be entirely ineffective to guard against the risks of insolvency, whatever they are. The Paper Company are not in bankruptcy. There is nothing to prevent their making some payment to the plaintiff, if not more than the dollar which has already been paid by the sale of their property, and which at least, on the defendants' own contention, they are now legally liable to pay. Every dollar paid over by the Paper Company would establish a fresh obligation of the Insurance Company to pay, until the $5,000 limit was reached. Insolvency merely could not be a practical defence against the will of the assured. To effect the purpose for which it is claimed the provision was inserted, it would be necessary to limit the insurers' liability to the reimbursement of the insured for the value of his property sold under execution in a suit upon a claim covered by the policy. It is not probable the object of the provision was a purpose it is so ill-adapted to effect.

Great stress has been placed upon the two decisions upon like policies in New Jersey and Maine. Frye v. Company, 97 Me. 241; Travellers Ins. Co. v. Moses, 63 N.J. Eq. 260. In neither of these cases, as has been stated, was any attention given to the stipulations as to the manner in which the contract of indemnity was to be performed, while in the Maine case the parties apparently abandoned these provisions of the contract, for the defence of the original suit was not conducted in accordance with the terms of the present contract, but by the assured and the insurers jointly, and the question of the effect of the assumption of the defence and sole control of the original suit was not and could not have been raised.

The weight of the New Jersey case as an authority is diminished by the opinion in the court of chancery holding the contrary view, which is more in accord with the authorities on the question in this jurisdiction to which reference has been made. Notwithstanding the respect due to the opinions of these courts, the results reached in them cannot be followed in this jurisdiction. The proceeding is in equity and not at law. The facts that the plaintiff is in no way a party to the contract of indemnity, that he paid no part of the consideration, that the contract was one exclusively between the Paper Company and the Insurance Company for the protection of the former, upon which reliance is placed, are not decisive in equity. In Holt v. Bank, 62 N.H. 551, Holt was not a party to the mortgage which he sought to enforce. It was not made for his benefit, but to indemnify Gage from his liability as surety. Gage had never been and could not be damnified, because it had been judicially determined that he was not liable to the plaintiff; but Holt's right to the provision that had been made by his debtor for the ultimate discharge of his debt in case the surety paid was maintained. The ground upon which the plaintiff's equitable right to the provision made by his debtor for the ultimate discharge of a claim which might arise against him can, consistently with the authorities in this state, be denied, is not apparent. Neither is it clear that the Paper Company, while unable to maintain an action at law upon the policy without payment of the judgment against them, might not in equity obtain such a performance of the contract of indemnity as would protect them without such prior payment. There are authorities in this state and elsewhere tending to sustain power in equity to compel the specific performance of a contract to indemnify before there has been such a breach of the contract as would sustain an action at law. "In equity," it is said, "the plaintiff need not pay and perhaps ruin himself before seeking relief. He is entitled to be relieved from liability." Johnston v. Association, L. R. 19 Q. B. Div. 458, 460. See, also, Hunt v. Association, 68 N.H. 305, and cases cited; First Nat'l Bank v. Hunton, 70 N.H. 224; Champion v. Brown, 6 Johns. Ch. 398; Burroughs v. McNeill, 2 Dev. B. Eq. 297, 302; Central Trust Co. v. Trust Co., 87 Fed. Rep. 23; Ranlaugh v. Hayes, 1 Vern. 190; Lacey v. Hill, L. R. 18 Eq. 182; Wolmershausen v. Gullick, [1893] 2 Ch. 514; Cruse v. Paine, L. R. 6 Eq. 641, — 4 Ch. App. 441; Sto. Eq. Jur., s. 850;. Bisp. Eq., s. 331; Lind. Part. 375.

Except for the provision that the damages must be ascertained by a judgment after a trial of the issue (immaterial in this case, because such trial had been had), clause 8 is a mere statement of the law. The surety cannot sue the principal until he has paid the debt; but that does not prevent the interposition of equity to require the principal to pay and save the surety harmless.

But it appears sufficient to rest the decision upon an interpretation of the contract which gives effect to all its provisions, avoids any conflict between them, and is fairly and reasonably inferable from the evidence. The view that the contract means that the Insurance company, after taking control of the proceedings in a suit against the assured, cannot thereafter be discharged except by payment of the indemnity to the assured or securing his discharge from the claim, is thought to best conform to the intent of the parties, and is adopted. Whether in a case where the company did not so proceed the assured could in any form of procedure obtain any benefit from the contract of indemnity, except upon proof of the payment of damages after a trial of the issue, is not now before the court.

Decree for the plaintiff.

WALKER, J. did not sit: the others concurred.