# Queen City Farms, Inc. v. Central Nat'l Ins. Co. of Omaha

> Washington Supreme Court · July 20, 1995 · 126 Wash. 2d 50

URL: https://www.frixlaw.com/law-library/cases/9855181

## Case

- **Full name:** Queen City Farms, Inc., Respondent, v. the Central National Insurance Company of Omaha, Et Al, Petitioners
- **Court:** Washington Supreme Court
- **Decided:** July 20, 1995
- **Citations:** 126 Wash. 2d 50; 882 P.2d 703
- **Precedential status:** Published
- **Opinion:** Dissent by Utter
- **Judges:** Brachtenbach, Andersen, Utter, Guy, Madsen
- **Cited by:** 294 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9855181

## How later opinions describe it (automated extraction)

- finding, prior to Woo, a subjective standard applied where an insurance policy provided that an occurrence was covered ‘“which unexpectedly and unintentionally’” resulted in damage, and distinguishing cases in which cpurts relied on common law definitions of “accident”
- recognizing that sometimes language in standard policies does not involve mutual negotiations between the insurers and the insureds
- holding that a party does not need to object to factual distinctions in a special verdict form when the “issue was resolved on a summary motion brought before trial” and the trial court declined to reconsider its summary judgment ruling
- concluding that “these exclusions are ambiguous, and therefore should be construed against the drafter-insurer, to mean that if the polluting event is unexpected and unintended, coverage is provided”
- recognizing that questions of expectation in this context “may be said to involve state of mind, but that does not resolve the inquiry whose state of mind—the insured’s or a reasonable person’s”

## Opinion text

Utter, J.
(dissenting) — I disagree with the majority’s conclusion the trial court improperly denied a motion for a judgment n.o.v. with respect to the Lloyd’s of London policy. Because evidence was presented from which the jury reasonably could have inferred a material misrepresentation was made, we should respect the jury’s finding of fact on this issue.
The jury was instructed that the insurers bore the burden of proving by clear, cogent, and convincing evidence that a material misrepresentation had been made by the insured with the intent to deceive the insurers. Instructions 7, 8. Clerk’s Papers (Appellant) vol. 4, at 1119-20. The jury returned a verdict in favor of Lloyd’s and Central National.
A judgment n.o.v. may only be granted when, viewing the evidence and reasonable inferences that can be drawn from it most favorably to the nonmoving party, the court can say as a matter of law that there is no substantial evidence to support the verdict. Nord v. Shoreline Sav. Ass’n, 116 Wn.2d 477, 486 , 805 P.2d 800 (1991) (citing Cowsert v. Crowley Maritime Corp., 101 Wn.2d 402, 405 , 680 P.2d 46 (1984)). Substantial evidence is evidence which "would convince an unprejudiced, thinking mind of the truth of the declared premise.” Nord, 116 Wn.2d at 486 (quoting Cowsert, 101 Wn.2d at 405 ). The record contains substantial evidence to support the jury’s verdict both with respect to the fact a misrepresentation was made and that it was material. The jury heard the evidence described below.
Seattle Disposal Company/Queen City Farms, Inc. owners hired insurance brokers to obtain comprehensive insurance for Seattle Disposal Company (SDC) and its related companies, including a commercial garbage hauling busi *107 ness and Queen City Farms, Inc. (QCF). The broker who obtained the Lloyd’s coverage was Ronald Kokesh. See transcript of Testimony of R.E. Kokesh (May 19, 1988), at 19.
In an 8-page letter written in 1965 to the prospective insurers, Mr. Kokesh described the various activities and risks associated with the companies. He described the QCF operation by explaining that the owners of SDC "also have buildings which they rent and some vacant land plus a 160 acre [farm] (Queen City Farms) which formerly was a hog ranch but which now is vacant.” Clerk’s Papers (Respondent) vol. 17, at 3224. In fact, the site was 320 acres with at least two houses, other buildings, an airstrip, and an industrial waste dump site, consisting of open pits of liquid industrial waste. See transcript of Testimony of John Banchero (May 12,1988), at 14-15. Although the dumping ceased in 1969 or 1970, the pits remained on the property filled with liquid industrial wastes.
Upon receipt of Kokesh’s letter, the Lloyd’s broker telexed back asking "WHERE RUBBISH DISPOSED AND SURROUNDING NUISANCE EXPOSURE.” Exhibit A-62 (Dec. 21, 1965 cable). Kokesh esponded "[INSURED] ONLY DELIVERS GARBAGE RUBBISH AND NO RESPONSIBILITY DUMPSITE THEREFORE NO EXPOSURES THIS ASPECT AND CONSIDER GOOD RISK UMBRELLA STOP.” Exhibit A-62 (Dec. 23, 1965 cable).
At the time this representation was made, it is uncontested that QCF’s owners and Mr. Kokesh knew about the industrial waste pits at Queen City Farms. See transcript of Testimony of Kokesh (May 19, 1988), at 16. It was therefore well within the jury’s province to conclude a misrepresentation was made when Kokesh responded that QCF had no responsibility for a dumpsite. The materiality of that misrepresentation was likewise a question of fact for the jury. Because the jury heard evidence from which it reasonably could have inferred a material misrepresentation, we should affirm the trial court’s denial of a judgment n.o.v.
The jury heard the testimony of Andrew Drysdale, a Lloyd’s underwriter, who indicated the significance to an insurer of Kokesh’s failure to mention the waste pits:
*108 Q: Now, I’d. also ask — like to ask you another question about the December 11, 1966, letter.
Do you consider that letter to be fairly lengthy, in terms of the type of letters you would receive, in terms of giving information about potential insureds in that time period?
A: Yes.
Q: And it is fairly complete, again, relative to the type of letters you received during that time period with respect to potential insurers?
A: I am afraid that one gets cynical as an underwriter, and it is an axiom of underwriting that the longer the letter, the least it will disclose the one vital element of information required.
Q: Well, that can also be because at the time the element may not seem to be material to anyone’s mind?
A: It would be a most incredible person who thought that a dump site was immaterial to the placement of Seattle Disposal Company’s insurances.
Q: Well, do you believe that it would have been an honest mistake for Mr. Kokesh in writing back to his Telex response to assume, as you have assumed, that you were focusing, or that the Lloyd broker was focusing on Seattle Disposal and not Queen City Farms in asking about the insured’s dumping practices?
A: I don’t think it is for me to fathom the inscrutable workings of Mr. Kokesh’s mind.
Q: ... It is certainly possible that Mr. Kokesh honestly could have felt he was fully answering the question about [the] details where rubbish was dumped, in answering about Seattle Disposal, isn’t that correct?
A: Mr. Kokesh was asked an important question and gave a categoric assurance in the negative.
He either knew that what he was telling was a lie, or if he didn’t know that it was a lie, he had failed to ask his client the question and secure proper instructions.
Q: So you’re not willing to give Mr. Kokesh the benefit of your presumption when you read his December 11th letter that you would have asked about Seattle Disposal’s garbage operations, and that that particular aspect was being asked about in the Telex?
A: I think in his answer, Mr. Kokesh reveals himself either to be a fool or a knave.
Q: . . . A fool or a knave, but he could [have] been an honest one?
A: He can certainly be an honest fool. It is difficult to imagine an honest knave.
Q: I would also like to ask you another question. The Telex going from the Lloyd’s broker to Mr. Kokesh asked for *109 details where rubbish disposed and surrounding nuisance exposure. Isn’t it correct that the surrounding nuisance exposures most concerned about there would have been noise and smell associated with the dump?
A: That is correct. In the letter Mr. Kokesh had described —
Q: Thank you, Mr. Drysdale. You have answered the question. Now, in responding to questions about details where rubbish disposed, isn’t it true that a response to the effect that rubbish, garbage is disposed in an isolated area, not near surrounding homes, would have been the type of positive response that the Lloyd’s broker was looking for?
A: The Lloyd’s broker was looking for confirmation that Mr. Kokesh’s letter accurately described his client’s activities; namely, that he collected garbage, not that he ran either a dump site or a garbage dump.
(Italics mine.) Transcript of Testimony of Andrew Drysdale (May 20, 1988), at 58-60.
The majority maintains Drysdale’s testimony should have been excluded on the grounds it was "wholly lacking [in] some factual basis” and there was "no basis for the expert opinion other than theoretical speculation”, because Drys-dale did not underwrite the QCF insurance at issue and had no personal knowledge of Lloyd’s underwriting practices generally. See majority, at 103.
The majority’s characterization of Drysdale’s testimony is unwarranted. Drysdale was an underwriter at Lloyd’s during the period in question. As such, he was qualified to present his opinion whether the presence of an industrial waste site would have been material to a Lloyd’s underwriter in 1966, and whether it was the sort of information which would generally be elicited by Lloyd’s inquiry regarding nuisance exposure. See transcript of Testimony of Drysdale (May 20, 1988), at 40-42.
The other reason the majority advances to support its conclusion that Drysdale’s testimony was erroneously admitted is likewise unpersuasive. The majority maintains that Drysdale’s testimony went beyond the proper scope of expert testimony. Drysdale, however, specifically averred on the question of Kokesh’s state of mind. See transcript of Testimony of Drysdale (May 20, 1988), at 40-42. ("It is not for me to fathom the inscrutable workings of Kokesh’s mind.”) *110 That determination was for the jury to make, and the jury made it.
In addition to Mr. Drysdale’s testimony, the jury heard testimony from other professionals who had been in the insurance industry in the 1960’s. Some indicated the presence of an industrial waste site should have been disclosed upon request for a general description of the property, and that this information would have been material to an insurer during the relevant period; 7 others contested this testimony. Because the testimony about materiality was contested at trial, it was for the jury to evaluate the credibility of the parties and their assertions, and enter its findings accordingly.
On the record before us, the majority’s conclusion the trial judge improperly denied a motion for judgment n.o.v. with respect to the Lloyd’s policy is untenable. Construing the evidence presented and the inferences that reasonably can be drawn from it in Lloyd’s favor, as we must, the trial court properly denied the motion.
*111 Queen City maintains that Lloyd’s was required to tender back all premiums to preserve the defense of misrepresentation. The argument is unpersuasive.
The record contains a letter prior to trial on behalf of two of the named insurers offering to tender back the premiums and indicating that "it is our understanding that the premiums were tendered in a single sum on behalf of all the named insureds under the policies, making it difficult to now go back and compute QCF’s proportionate share of the premium.” (Italics mine.) Letter, app. A Br. II of Resp’ts (Misrepresentation and Evidence Issues). The letter further states that the proportionate share of the premiums owed should be postponed pending a ruling on the misrepresentation issue, after which the proportionate share of the sums owed could be computed with the court’s supervision.
The letter does not refer to Lloyd’s and could be construed to only refer to Industrial Indemnity and U.S. Fire. If given its broadest interpretation to include Lloyd’s, there still remains the question of whether one insured can speak for another, a question that need not be reached. Only if the defrauded party elects the remedy of rescission must the party tender the payments received under the contract. See Glandon v. Searle, 68 Wn.2d 199, 204 , 412 P.2d 116 (1966) and Neat v. United States Fid. & Guar. Co., 170 Wash. 625 , 17 P.2d 32 (1932) (tender of payments required of a party who seeks to rescind a policy).
Under contract law, a material misrepresentation permits the defrauded party to elect from three possible remedies: damages, rescission, or enforcement of the bargain against the fraudulent party according to the fraudulent party’s representation of the bargain. See 12 Samuel Williston, Contracts § 1523, at 606-07 (3d ed. 1970). In this case, Lloyd’s could have sought to rescind the policy, affirm the policy and sue for misrepresentation, or, as it did, affirm the policy and assert misrepresentation as a defense.
If, as here, the defrauded party elects not to rescind the contract, tender of payments is not required:
*112 There is a wide distinction between an action brought to rescind a contract on the ground of fraud, and an action to recover damages for fraud arising out of a contract. The action to rescind is of an equitable nature, and the party seeking equity must do equity. On discovering the fraud, the party injured must tender back to the other party the benefits of the contract, so far as received by him, and place the other party as nearly as possible [in status quo]. He must act promptly, keep his tender available, and bring his action without unreasonable delay. The action for damages is a law action for a money judgment, requires no tender, and may be brought by the injured party at any time within the statute of limitations. Nor does an affirmance of the contract after discovery of the fraud extinguish the right to an action for damages on account of the fraud. An affirmance bars only the right to rescind.
.(Italics and boldface mine.) Pronger v. Old Nat’l Bank, 20 Wash. 618, 625-26 , 56 P. 391 (1899).
QCF’s reliance on Glandon v. Searle, supra at 204, and Neat v. United States Fid. & Guar. Co., supra, is misplaced. In both cases, the insurers sought to rescind the contract on the ground the insured’s misrepresentations rendered the policies void ab initio. Glandon, 68 Wn.2d at 203 ; Neat, 170 Wash. at 632 . Because Lloyd’s does not seek to rescind the contract, but rather to affirm the contract under the terms as represented by Queen City Farms, the absence of tender does not operate to waive its right to assert the defense of misrepresentation.
Also unpersuasive is Queen City’s contention that RCW 48.18.080 required the trial court to exclude from evidence the correspondence preceding Lloyd’s issuance of the insurance policy. The statute requires the insured’s application for insurance to be attached to the policy when issued:
No application for the issuance of any insurance policy or contract shall be admissible in evidence in any action relative to such policy or contract, unless a true copy of the application was attached to or otherwise made a part of the policy when issued and delivered.
RCW 48.18.080.
The critical inquiry with respect to this issue is whether the correspondence between the parties constituted an application for the purposes of construing the attachment statute. *113 We conclude that it did not. To hold otherwise would be to transform all paper trails of negotiations into applications, even where neither party so intended. Moreover, the Legislature does not appear to have intended the (protective) attachment requirement to apply in situations where sophisticated commercial entities are negotiating with one another at arm’s length. Had the Legislature wished it to apply, it could have required an application in that context. See RCW 48.18.060 (in which the Legislature has expressly required insurance companies to have applications for any "life or disability insurance contract upon an individual”, with some exceptions). (Italics mine.)
The statute recognizes the differences between statements made during negotiations and those appearing on that application for insurance. With respect to the former it provides:
[N]o oral or written misrepresentation or warranty made in the negotiation of an insurance contract, by the insured or in his behalf, shall be deemed material [to] defeat or avoid the contract or prevent it attaching, unless the misrepresentation or warranty is made with the intent to deceive.
RCW 48.18.090.
Queen City maintains that Lundmark v. Mutual of Omaha Ins. Co., 80 Wn.2d 804 , 498 P.2d 867 (1972) requires this court to find that correspondence between the parties constitutes an application. There, an insured completed a written application for insurance. Shortly thereafter, the insured discovered he had an ailment which he had not disclosed, and communicated it to the insurance company. A memorandum reflecting the new information was subsequently prepared by the insurer, which then rewrote the policy. When the insured later filed a claim, the trial court excluded both the application and the memorandum under RCW 48.18.080, on the ground the insured was entitled to have the whole application before him, if it could be used against him as a defense. Lundmark, 80 Wn.2d at 807 .
Lundmark is distinguishable from the case at bar because in that case a written application had been made in the first *114 instance. Where an application has been initially made, it is sensible to require substantial modifications to it to be attached to the original policy. Lundmark does not establish that where, as here, there is no initial application, all correspondence should be treated as an application.
In sum, I conclude the attachment statute does not apply on these facts. The statute by its terms does not require a formal application under the circumstances at issue here; and the correspondence between Queen City’s broker and Lloyd’s is, in any event, properly characterized as negotiations. Accordingly, it should not be treated as an "application” under RCW 48.18.080.
Our holding on this issue does not prevent an insurance company from making insurance coverage contingent upon the completion of a formal application if it so chooses; nor does it preclude the Legislature from amending the statute to encompass the circumstances presented here if it sees fit.
Durham, C.J., Guy and Madsen, JJ., and Andersen, J. Pro Tern., concur with Justice Utter’s resolution of the issue whether Lloyd’s should be precluded from raising a misrepresentation defense due to failure to tender back premiums before trial, and the issue whether correspondence preceding Lloyd’s issuance of its policies should have been excluded from evidence under RCW 48.18.080.
For example, Catherine Davidson, who was employed by Travelers Insurance Company as an underwriter in the 1960’s, indicated in her testimony that the presence of such a site would have presented a nuisance exposure, would have affected the decision to insure, transcript of Testimony of Catherine Davidson (May 24,1988), at 22, and should have been identified on the application for insurance. See transcript of Testimony of Davidson, at 26-27. She also testified that underwriters at Travelers Insurance were becoming aware of pollution risks in the 1960’s. Transcript of Testimony of Davidson, at 24.
Mr. Linden, a liability underwriting manager in 1966 at Industrial Indemnity Insurance, testified that the insurance aspects of pollution were becoming appreciated in the mid to late 1960’s. Transcript of Testimony of Lee Linden (May 5,1988) vol. 1, at 38. He also testified that although the insurance application probably would not have inquired about pollution risks per se, see transcript of Testimony of Linden vol. 2, at 12, it would have requested a description of the property, specifically "the types of property that were owned: For example, a store or a dump site or vacant land, whatever the insured is presenting to use for insurance purposes.” Transcript of Testimony of Linden vol. 1, at 10-11. He also testified that had the insurance company known about the liquid industrial waste ponds it probably would not have insured the site. Transcript of Testimony of Linden vol. 2, at 10. See also transcript of Testimony of Linden vol. 1, at 44, indicating such knowledge would have affected the decision to insure.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9855181. Public record. Not legal advice.