Canal Insurance v. Benner

• Court: Court of Appeals for the First Circuit
• Decided: November 24, 1992
• Docket: 92-1360
• Status: Published

Opinion

USCA1 Opinion

November 24, 1992
                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

          No. 92-1360

                               CANAL INSURANCE COMPANY,

                                 Plaintiff, Appellee,

                                          v.

                              DARRELL A. BENNER, ET AL.,

                                Defendants, Appellees,

                                 ____________________

                                    GARY LEBRETON

                                Defendant, Appellant.
                                 ____________________

          No. 92-1420

                               CANAL INSURANCE COMPANY,

                                 Plaintiff, Appellee,

                                          v.

                                 DARRELL A. BENNER, 

                                Defendant, Appellant.

                                 ____________________

                    APPEALS FROM THE UNITED STATES DISTRICT COURT

                              FOR THE DISTRICT OF MAINE

                     [Hon. Morton A. Brody, U.S. District Judge]
                                            ___________________

                                 ____________________

                                        Before

                              Torruella, Circuit Judge,
                                         _____________

                            Aldrich, Senior Circuit Judge,
                                     ____________________

                              and Boudin, Circuit Judge.
                                          _____________

_____________________

               Valerie Stanfill, with whom Paul F. Macri, Berman & Simmons,
               ________________            _____________  _________________
          P.A., Peter B.  Bickerman and Lipman & Katz, P.A.,  were on brief
          ____  ___________________     ___________________
          for appellants LeBreton and Benner.
               John W. Ballou, with  whom Mitchell & Stearns, was  on brief
               ______________             __________________
          for appellee Canal Insurance Company.

____________________

____________________

Per  Curiam.   On this appeal,  we review  the district
                    ___________

          court's  interpretation of  a motor  vehicle liability  insurance

          policy.  The district court initially found an  "occupant hazard"

          exclusion clause in the policy void as contrary to public policy.

          It then held  that the amount of coverage under  the policy would

          be limited  to the minimum  amount required by  Maine's Financial

          Responsibility Law, rather  than the full  and greater amount  of

          liability coverage provided  by the policy.  The  insured appeals

          the latter determination.  We affirm.

                                          I

                    Darrell Benner was the named insured in a motor vehicle

          liability  insurance policy  issued  by Canal  Insurance  Company

          ("Canal").    The   policy  contained  an   endorsement  entitled

          "Occupant Hazard Excluded," which reads as follows:

                      It is  agreed that  such insurance  as is
                      afforded by the policy for  Bodily Injury
                      Liability does not apply to Bodily Injury
                      including  death  at  any time  resulting
                      therefrom, sustained by any  person while
                      in  or upon,  entering or  alighting from
                      the automobile.

                      It is  further agreed that,  in the event
                      the company shall,  because of  provision
                      of  the Federal or  State statutes become
                      obligated to pay any sum or sums of money
                      because  of such  bodily injury  or death
                      resulting  therefrom, the  insured agrees
                      to reimburse the company  for any and all
                      loss, costs  and expense incurred  by the
                      company.

                    On  August 30, 1990, Gary LeBreton was a passenger in a

          tractor  trailer owned by Benner  and driven by  Keith Whitney on

          State Highway Route 137 in the Town of Knox, Waldo County, Maine.

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The tractor left the road, overturned and LeBreton was injured.  

                    LeBreton  brought suit  against Benner  and Whitney  in

          Waldo County Superior Court seeking damages for his injuries.  In

          that action, LeBreton alleges that Whitney's  negligent operation

          of  the tractor trailer caused the injuries he sustained and that

          Benner is  liable because Whitney was acting as Benner's employee

          at the time of the accident.  

                    Benner  called   upon  Canal  to  defend   him  in  the

          litigation and  to indemnify  him  up to  the policy  limit.   In

          response, Canal  brought this declaratory judgment  action in the

          District Court for the District  of Maine seeking a determination

          that  it  was not  obligated under  the  policy to  defend either

          Benner,  or his  employee, Whitney,  nor to  indemnify  Benner or

          Whitney for any damages that they may have to pay to LeBreton.  

                    The parties  filed cross-motions for  summary judgment.

          The  district   court  granted  summary  judgment   in  favor  of

          appellants Benner, Whitney and LeBreton finding that the Occupant

          Hazard  Exclusion  was  contrary  to  public  policy  because  it

          conflicted   with   Maine's   Financial    Responsibility   Law.1

          Regarding the  amount of coverage to be  paid by the insurer, the

          court  concluded that Canal was  obligated to pay  to its insured

____________________

          1   Section 780  of that law  requires that "[e]very  operator or
          owner of  a motor vehicle, trailer, or  semitrailer registered in
          this  State  shall maintain  at all  times  the amounts  of motor
          vehicle liability insurance or financial responsibility specified
          in  Section 787."   29 M.R.S.A.    780.   Section  787 requires a
          minimum  $20,000 for  one  person and  $40,000  for two  or  more
          persons  injured in the same accident and $10,000 of coverage for
          property damage.

                                         -4-

the minimum  amount required by Maine's  financial responsibility

          statute -- $20,000 for  any one person injured -- rather than the

          full amount  of liability coverage  of $750,000  provided by  the

          policy.  The  district court's determination to limit coverage to

          the minimum  amount required by  Maine's financial responsibility

          Law was premised on two "facts":

                      First,  the premium  paid for  the policy
                      was undoubtedly based on the inclusion of
                      the occupant exclusion.  Second, and more
                      importantly, even though the exclusion is
                      contrary  to  public  policy the  insurer
                      would still have the opportunity to limit
                      its policy to the minimum amount required
                      by the statute, and limit excess coverage
                      by an occupant exclusion.

                    Unsatisfied  with this  result,  appellants Benner  and

          LeBreton  appeal claiming  that  the district  court should  have

          awarded  the full amount  of liability  coverage provided  by the

          policy.2

                                          II

                    Rule  56(c) of  the  Federal Rules  of Civil  Procedure

          mandates  the  entry  of  summary  judgment  "if  the  pleadings,

          depositions, answers to interrogatories, and admissions on  file,

          together  with  the affidavits,  if any,  show  that there  is no

          genuine issue as to any material  fact and that the moving  party

          is entitled  to judgment as a  matter of law."   See also Celotex
                                                           ________ _______

          Corp. v.  Catrett,  477 U.S.  317,  323 (1986).    We review  the
          _____     _______

          district  court's grant  of summary  judgment de  novo.   FDIC v.
                                                        __  ____    ____

____________________

          2  Canal has  not appealed the district court's  holding that the
          occupant hazard exclusion is void. 

                                         -5-

World  University Inc.,  No. 92-1389,  slip. op.  at 4  (1st Cir.
          ______________________

          October  22, 1992) ("Our review  of a summary  judgment ruling is

          plenary.").   

                                         III

                    The issue of whether, if an endorsement in an insurance

          policy is held void as contrary to the State's public policy, the

          limit of liability  under the  policy will apply  (in this  case,

          $750,000)  or whether  the limits  should  be those  contained in

          State  law  ($20,000)  has  divided courts.    Some  courts  have

          concluded that  the liability  limit  is the  full and  generally

          greater amount of coverage.  E.g., State Farm Mut. Auto. Ins. Co.
                                       ____  ______________________________

          v. Wagamon, 541 A.2d  557 (Del. 1988);  Meyer v. State Farm  Mut.
             _______                              _____    ________________

          Auto.  Ins.  Co., 689  P.2d  585 (Colo.  1984);  Missouri Medical
          ________________                                 ________________

          Insurance  Co. v. Wong,  676 P.2d 113 (Kan.  1984).  Other courts
          ______________    ____

          limit the liability to the minimum statutory requirements.  E.g.,
                                                                      ____

          Collins v. Farmers Ins. Co., 822 P.2d 1146 (Or. 1991); Walther v.
          _______    ________________                            _______

          Allstate  Ins.  Co., 575  A.2d 339  (Md.  App. 1990);  State Farm
          ___________________                                    __________

          Mutual v. Nationwide Mut., et  al, 566 P.2d 81 (Md.  1986); Tibbs
          ______    _______________________                           _____

          v. Johnson, 632 P.2d 904 (Wash. 1981); De Witt v. Young, 625 P.2d
             _______                             _______    _____

          478 (Kan. 1981);  Estate of  Neal v. Farmers  Ins. Exchange,  566
                            _______________    ______________________

          P.2d 81 (Nev. 1977); State Farm  Mutual Auto Ins. Co. v.  Shelly,
                               ________________________________     ______

          231 N.W.2d 641 (Mich. 1975). 

                    Maine's  Supreme Judicial  Court has  not decided  this

          issue.   Not  surprisingly, both  parties contend that  the Maine

          courts would follow their respective interpretation of the effect

          of  finding the  endorsement void.    Appellants assert  that the

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district court's  decision was contrary to the  clear language of

          the  policy because  the  policy provided  coverage of  $750,000.

          They  argue that  Canal  could have  drafted its  occupant hazard

          endorsement so that  if the exclusion were held invalid, coverage

          would  be limited to the  minimum amount of  the relevant state's

          financial responsibility  statute.   Appellants'  argument has  a

          superficial appeal, but no  real substance.  Absent bad  faith on

          the  insurer's  part,  why  should  a  state  requirement  for  a

          mandatory minimum impose not only  the minimum, but an additional

          amount  on this  particular  insurer simply  because, in  another

          connection,  it  had  undertaken  additional  coverage?   Without

          reaching constitutional  questions, this would  be an exaggerated

          application of public policy.

                    Appellants  further argue  that public  policy concerns

          should have led  the district  court to apply  the policy  limit.

          The  district  court's  decision  limits  recovery  available  to

          injured  parties  to the  minimum  amount  which the  Legislature

          established was necessary even  though the legislative intent was

          to maximize insurance coverage.  

                    Finally, appellants argue that  there is no evidence in

          the  record to  support  the district  court's finding  that "the

          premium  paid  for  the  policy  was  undoubtedly  based  on  the

          inclusion of the occupant exclusion."   This last argument defies

          common sense because the  premium that one pays for  an insurance

          policy is based on the amount of risk.

                     In Nichols v. Anderson, 837 F.2d 1372 (5th Cir. 1988),
                        _______    ________

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the Fifth Circuit held  that if an  exclusion in a motor  vehicle

          policy is held invalid as  against public policy, coverage should

          be  limited to  the extent  required to  meet the  State's public

          policy.  The  motor vehicle insurance policy in Nichols contained
                                                          _______

          an endorsement limiting coverage to accidents within 150 miles of

          McCrory,  Arkansas.    The  Fifth Circuit found  that endorsement

          void  as against  the  public policy  of  Arkansas. Id.  at  1374
                                                              __

          (citing Nichols v. Anderson, 788 F.2d  1140 (5th Cir. 1986)).  In
                  _______    ________

          the absence  of Arkansas decisions providing  guidance, the Fifth

          Circuit relied  on Section  184  of the  Restatement (Second)  of
                                                   ________________________

          Contracts.  The court found as follows:
          _________

                      Subsection  184(1)  states  that if  less
                      than  all of  a contract  violates public
                      policy, the rest  of the contract  may be
                      enforced unless the unenforceable term is
                      an  essential  part   of  the   contract.
                      Clearly  in this case  we should not void
                      the entire insurance  contract, for  such
                      an action would contravene  the [State's]
                      policy   requiring   minimum   coverages.
                      Subsection     184(2)     expands     the
                      Restatement's rule and applies it  to the
                      ___________
                      specific term that  was found to  violate
                      public   policy.     According   to  that
                      subsection,  a court may  treat only part
                      of a term as invalid if the parties acted
                      in good faith.   This rule is intended to
                      apply when a  term is invalid  because it
                      is too broad and a narrower term would be
                      enforceable. 

          Nichols, 837 F.2d  at 1375 (citing    184 comment  b).  Based  on
          _______

          Section  184(2) of the  Restatement, the Fifth  Circuit held that
                                  ___________

          when there is no  claim of bad faith,  courts should "adjust  the

          contract  as little as  possible to enable the  parties to have a

          contract as  close to what  they intended as  possible."  Id.  at
                                                                    __

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1376.  Since the  radius exclusion clause was invalid  as against

          state  policy,  which required  $25,000  of  coverage, the  Fifth

          Circuit found that the  insurer should be liable for  $25,000 and

          not for the $100,000 policy limit.

                    We  find  the  Fifth  Circuit's  reasoning persuasive.3

          Basic  canons of  contractual interpretation support  the holding

          that when an  exclusionary clause is  invalidated, the effect  of

          the invalidation is to require the insurer to provide coverage up

          to  the statutory minimum.   Appellant's have made  no claim that

          Canal  acted in bad faith.    The  district court's determination

          that  "the premium paid for  the policy was  undoubtedly based on

          the inclusion of the occupant exclusion" is eminently reasonable.

          Insurance  policies are issued based  on risk, and excluded risks

          lower the  exposure  and concomitantly  the premium.   Since  the

          exclusion is  invalid due to the Financial Responsibility Law, an

          insurers' exposure  -- particularly when there  was no bargaining

          process relative to  that exposure  -- should be  limited to  the

          minimum required by Maine's Financial Responsibility Law.  

                    The judgment of the district court is affirmed.
                                                          ________

____________________

          3  In  their Reply  Brief, appellants argue  that Nichols is  not
                                                            _______
          applicable because  in Maine ambiguous insurance  policies are to
          be  construed  against the  drafter.   That  argument  misses the
          point.   The  insurance contract  at issue  is not  ambiguous; it
          contained  an exclusion that was contrary to the public policy of
          Maine.

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