Petition — Royal Indemnity Co. v. Prince

Supreme Court brief1977

Ask Donna

What actually matters in this document.

Text

| Supreme Court, U. 5.

FILED

DEC 8 1976

[ERE

IN THE

Supreme Court of the Qnited States

OCTOBER TERM, 1976.

no. 76-775

W. WOOD PRINCE anp JAMES F. DONOVAN, As TRUSTEES

OF THE CENTRAL MANUFACTURING DISTRICT,

Plaintiffs-Respondents,

vs.

ROYAL INDEMNITY COMP ns

efendant-Petitioner ow

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SEVENTH CIRCUIT.

JoHN P. GORMAN,

JAMES T. FERRINI,

JosEPH J. MCDONOUGH,

CLAUSEN, MILLER, GORMAN,

CAFFREY & WITOUS,

135 South LaSalle Street,

Chicago, Illinois 60603,

Attorneys for Defendant-Petitioner.

Gunthorp-Warren Printing Company, Chicago e Financial 6-6565

INDEX.

PAGE

+ SS RE ee eee ee ee 2

Grounds on Which the Jurisdiction of This Court

I Chit once ncdcinds bébn eRe awe 08 eee 2

Questions Prosented.......0...scccccccccecceecees 3

Constitutional and Statutory Provisions Involved........ 5

ee Gir We I bv io 4-3 40 Orr 00-95 0650-0055 6b 50s 6

PPP erere rr Ter rer T eeTTTrrerie Tree 12

I. Respondents’ Conveyance of Properties Divested

Any Interest Protected by the Policy of Insurance.

The Court of Appeals’ Refusal to be Bound by

Illinois Law Is Violative of That Principle Founded

in Constitutional Safeguards That, for Purposes of

Diversity Jurisdiction, a Federal Court Is in Effect

Only Another Court of the State............... 12

A. Preliminary—Proper Focus................ 12

B. The Court of Appeals’ “Distinction” of the

Illinois Rule on Insurable Interest Is Illusory;

That Court Simply Substituted Its Own Opin-

ion for Illinois Law Which Here Required That

Judgment be Entered in Favor of Petitioner.. 15

C. Respondents Did Not Sustain the Required

“Direct” Pecuniary Loss. The Indemnity Which

Respondents Sought for Indirect Loss Is

Afforded Only by “Errors and Omissions”

Coverage; It Is Not Afforded Under the Policy

of Property Imsurance.............+e000- 23

II. The Refusal to Accept the Binding Principles of

Iilinois Law Is an Unconstitutional Abrogation of

the Requirement That in Diversity Cases State Law

EE 63060 kudha wide ule cide eiebas anus oes 30

PE 140 been enguenisbenebeveeeeiaweere 32

Appendix A (The Opinion of The United States Court

Of Appeals)... ...ceee. PVETTCTULT YT Te Terre ere Al-8

Appendix B (The District Court’s Opinion).......... A9-19

Appendix C (Stipulation of Facts Considered by the

sk 540 Ob babes nde bekeeeebednas A20-31

Appendix D (The Order Denying the Petition for Re-

RD -0.n 6 SSN 06S ob cweseeudsencececdesoveew'e A32

TABLE OF CASES.

Agricultural Insurance Co. v. Clancey, 9 Ill. App. 137

Ps ckethest routes ehensd ds Meneeesesied« 19

Bird v. St. Paul Fire & Marine Insurance Co., 224 N. Y.

ey ee as Os OP Ca Sik oe eke hen iea beds veces 23

Bolling v. Sharpe, 347 U. S. 497, 74 S. Ct. 693, 98

Ss F | Fo SPT eT re TT Tree Tree 5,31

Capps v. National Union Fire Insurance Co., 318 Ill. 350,

Fe 8 PT ee Te Te eee Cee 18

City of Nokomis v. Smith, 74 Ill. App. 2d 211, 219 N. E.

Rh ft | Peery rere Tes TePT TT Tee PT ee eee 24

Danvers Mutual Fire Insurance Co. v. Schertz, 95 Ill. App.

jt POPPEPT ET OTTT TEST TTT Terr TTT er eri ee 18

Downs v. Michigan Commercial Insurance Co., 157 Ill.

Erie R. Co. v. Tompkins, 304 U. S. 64, 58 S. Ct. 817, 82

Se © 8 fF TT reer rer ree 12, 30, 31

- .

iii

Estes v. Great American Ins. Co., 112 S. W. 2d 153

GED 66-0 c6d nee stsiSeb eeisckodbedeceweseses 21

Fidelity Union Trust Company v. Field, 311 U. S. 169, 61

S. Ct. 176, 85 L. Ed. 2d 109 (1940) ..........00e, 30

Fray v. National Fire Insurance Co., 341 Ill. 431, 173

Pe te Ge CE occ edscewcececcnnccevsscoévues 18

Griffin v. Pfeffer Lumber Co., 285 Ill. 19, 120 N, E. 583

SRE 6 cvetcccevtcedvccsquectcceeecoestweusa 18

Guaranty Trust Co. v. York, 326 U. S. 99, 65 S. Ct. 1464,

OD L. BG. BB DOPOD (IDES) «oc cccccccisccccccvces 31

Hartford Accident & Indemnity Co. v. Della & Fine Land

Co., 292 U. S. 143, 54 S. Ct. 634, 78 L. Ed. 2d 1178

(Perry Te TT TTT Ter TTT T TT TTT TTT 31

Home Insurance Co. v. Dick, 281 U. S. 397, 50S. Ct. 338,

>) © | OT oR ee 31

Home Insurance Co. v. Mendenhall, 164 Ill. 458, 463, 45

oe iF. |, Pri Terrier Tree 17

Home Insurance Co. v. Peoria P. U. Ry. Co., 78 Ill. App.

BOD CONS 6 0 wah 0 66 00nd kee 66 ese eeeseesenaeses 18

lliinois Mutual Fire Insurance Co. v. Andes Insurance Co.,

67 Ill. 362, 363 (1873)... . cr cee cece ence eeeeneee 16

In Re Reynolds Estate, 94 Vt. 149, 105 A. 60 (1920).... 24

Klefstad v. American Central Ins. Co., 207 F. 2d 288 (7th

Fs 5 6.600.690.6056 600 bb 0b Wesestaevend 10, 27

Lieberman v. Hartford Fire Insurance Co., 6 Ill. App. 3d

948, 287 N. E. 2d 38 (1972)... cece eee eee eeees 16

Lucena v. Craufurd, 2 B. & P. N. R. 269, 324, 127 Eng.

Rep. 630, 651 (1805) ...... ec eee cece eee eeeeees 14

Lumberman’s Mutual Insurance Co. v. Edmister, 412 F. 2d

351 (Sth Cir., 1969)... ccccccccccccccvvcveveces 22

Marcuse v. Upton, 9 La. App. 28, 118 So. 790 (1928). .21, 32

Pappas v. Insurance Co. of State of Pennsylvania, 54 Tenn.

App. 640, 393 S. W. 2d 298 (1965) .........0006 21

Patterson v. Durand Farmers Mutual Fire Insurance Co.,

303 Ill. App. 128, 24 N. E. 2d 740 (1940).......... 16

Pfeffer v. Farmers State Bank of Schaumburg, 263 Ill. App.

SER, SHO CICS) . oc vccccccessienscanaenens 10, 13, 27

Pressly v. America, 14 N. C. App. 561, 188 S. E. 2d 734

CIDTE) . occvoveccconvecsenpuccue ween ae een 21

Prince v. Royal Indemnity Co., 404 F. Supp. 1076

CIDTS) oncccccvecvcsctdtescecetecss ee 2,15

Shadid v. American Druggist Fire Ins. Co. (Okla.), 386

DP. 36 301 CODED). woccccevendcctdeeeeences3a0ee 21

Welch v. Northern Assurance Co., 223 Ill. App. 77

(9GBE) on cvccccccccesseesveeteene en aeEE 18

West v. American Telephone & Telegraph Co., 311 U. S.

223, 61 S. Ct. 179, 85 L. Ed. 2d 139, 144 (1940)... .3, 30

Whelan v. Massachusetts Bonding & Insurance Co., 205

Ill. App. 122 (1917, pet. lv. app. den.).........-.. 19

Woods v. Interstate Realty Co., 93 L. Ed. 2d 1527...... 3*

Wriedt v. Beckenhauer, 183 Neb. 31i, 159 N. W. 2d

OBB CIDER) «oc ccccccecseesescssuees eee 21

TEXT.

Couch on Insurance 2d § 24:13 (1960).............. 19, 25

Couch on Insurance § 24:100, §24:101 (1960) ........ 20

Couch on Insurance § 44:2 (1960)........00 eee eeeee 24

Appleman, Insurance Law & Practice § 2241 (1941).... 20

22 Illinois Law & Practice: Insurance § 307............ 20

General Insurance, Magee, 4th Ed. p, 333...........-. 24

Principles of Insurance, Mehr & Cammach p. 373....... 24

IN THE

Supreme Court of the Gnited States

OcTOBER TERM, 1976.

No. ....

W. WOOD PRINCE anp JAMES F. DONOVAN, AS TRUSTEES

OF THE CENTRAL MANUFACTURING DISTRICT,

Plaintiffs-Respondents,

vs.

ROYAL INDEMNITY COMPANY,

Defendant-Petitioner.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SEVENTH CIRCUIT.

To the Chief Justice and Associate Justices of the Supreme

Court of the United States:

Petitioner respectfully prays for a Writ of Certiorari to

review the judgment of the United States Court of Appeals for

the Seventh Circuit.

THE OPINIONS BELOW.

The opinion of the United States Court of Appeals for the

Seventh Circuit in the cause therein numbered 76-1175 was

written by Circuit Judge Philip W. Tone and concurred in by

Circuit Judge Walter J. Cummings and Circuit Judge Harling-

ton Wood, Jr. The. opinion, which is appended hereto in

Appendix A post, is officially reported at 541 F. 2d 646 (1976).

The opinion of the United States District Court for the Northern

District of Illinois, Eastern Division was written by District

Judge William J. Lynch, and which the Court of Appeals

reversed and remanded, is set forth in Appendix B, hereto.

This opinion is officially reported at 404 F. Supp. 1076

(1975).

GROUNDS ON WHICH THE JURISDICTION

OF THIS COURT IS INVOKED.

(i)

The judgment of the United States Court of Appeals in this

cause was rendered on the 2nd day of September, 1976.

(ii)

A timely petition for rehearing was denied on the 22nd day

of September, 1976. That order is appended hereto as

Appendix D.

(iii)

The jurisdiction of this Court is invoked under United States

Code, Title 28, Section 1254, which provides for review of

the decisions of the United States Court of Appeals by Writ

of Certiorari granted upon petition.

QUESTIONS PRESENTED.

This is a diversity case involving a question of insurance

law—a matter of particular import to the state whose law was

“construed” and to the insurance industry, an integral part of

both the state and national economy. The primary issue is

whether an insured vendor who has transferred by deed all of

its right, title, and interest in property retains an insurable

interest therein by “acknowledging” a legal liability to the

vendee for its own negligence in failing to obtain the consent

of the insurer of an assignment of a fire insurance policy insur-

ing the property. The District Court for the Northern District

of Illinois, Eastern Division, Lynch, District Judge, entered judg-

ment in favor of the petitioner-insurer, pursuant to Illinois rule.

The Court of Appeals, Tone, Circuit Judge, repudiated and

rejected established Illinois rule that an insurable interest must

be an interest in the property itself, and held that when an insured

vendor undertook, on sale of the property, responsibility to obtain

the consent to assignment of the insurer, and neglected to do so,

insured vendor was liable to purchaser upon subsequent destruc-

tion of the property by fire and thus had an insurable interest to

the extent of such liability despite the insurer never having con-

sented to the assignment and despite the existence of a defense

against the vendee based on its failure to make inquiry con-

cerning delay in delivering consent, and in essence transforming

a fire insurance policy into an errors and omissions policy to the

extent of such liability.

The specific issues raised by this petition follow:

(a)

—whether this Court’s 1940 decision in West v. Ameri-

can Telephone & Telegraph Co., 311 U.S. 223, 61 S. Ct.

179, 85 L. Ed. 139, 145, wherein this Court held that a

federal Court “is not free to apply a different rule however

desirable it may believe it to be, and even though it may

think that the state supreme Court may establish a different

rule in some future litigation”, remains a viable and en-

forceable guideline in diversity cases which serves to pro-

tect the rightful independence of state governments and to

insure comity between those governments and the federal

judiciary.

(b)

—whether the Court of Appeals’ refusal to apply Illinois

law constituted a violation of the 10th amendment to the

United States Constitution and further, whether said re-

fusal was an unjust discrimination against those subject to

diversity jurisdiction and thereby—in contravention of the

constitutional safeguards of the Sth amendment—rendered

due process and equal protection of the law impossible.

ee es we ee

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED.

CONSTITUTIONAL PROVISIONS.

The Fifth Amendment io the Constitution of the United

States, the pertinent part of which reads:

“... nor shall any person . . . be deprived of . . . property,

without due process of law’. . .”

The Tenth Amendment to the Constitution of the United

States, which reads:

“The powers not delegated to the United States by the

Constitution, nor prohibited by it to the states, are reserved

to the States respectively, or to the people.”

STATUTORY PROVISIONS INVOLVED.

United States Code, Title 28, Section 1652 (commonly

known as Section 34 of the Judiciary Act), which provides:

“The laws of several states, except where the Constitution

or treaties of the United States or Acts of Congress other-

wise require or provide, shall be regarded as rules of deci-

sion in civil actions in the Courts of the United States, in

cases where they apply.”

1. While the Fifth Amendment to the United States Constitution

does not contain an explicit safeguard of an equal protection clause,

such protection is generally derived from the “due process” clause

of that Amendment. Bolling v. Sharpe, 347 U. S. 497, 98 L. Ed. 88,

74 S. Ct. 693 (1965).

STATEMENT OF THE CASE.

Basis for Federal Jurisdiction.

The basis for federal jurisdiction was diversity of citizenship

and the presentation of a claim in excess of the requ site juris-

dictional amount.

Prefatory Note.

Petitioner will limit its discussion to facts it deems neces-

sary to place this case in proper perspective. Those facts stip-

ulated by counsel which the District Court found relevant and

material are included as Appendix C.

Defense.

By its answer to the complaint, Royal Indemnity Company

(hereinafter referred to as “Royal”) denied both its liability to

plaintiffs for any sum whatsoever and that plaintiffs were injured,

if at all, to the extent claimed (Recd. 34, 35).

In its answer, Royal further stated that long prior to May

27, 1973:

“Plaintiffs sold, transferred and conveyed all of their

right, title and interest in and to said buildings to the

Prudential Insurance Company of America by Trustee’s

Deed dated January 4, 1973 and recorded in the office of the

Recorder of Deeds, County of Cook and State of Illinois,

on January 5, 1973 as Document 22 178 441 and that

promptly after the defendant learned of this fact, it

tendered to the plaintiffs the sum of $5,228.00 repre-

senting the return of premium applicable to said (prop-

erties) for that period of time subsequent to January 4,

1973 and denied any and all liability to the Plaintiffs for

loss sustained to the said buildings as a result of the fire

which occurred therein on May 27, 1973.” (Recd. 35.)

Policy Prohibition Against Assignment.

The policy, upon its cover sheet, states:

“Assignment of this policy shall not be valid except with

the written consent of this company.” (Recd. 12.)

The Sale.

On January 4, 1973, the Central Manufacturing District

(hereinafter referred to as “CMD”), pursuant to the terms of

a real estate sale contract, deeded and conveyed an A & P

grocery warehouse located at 4404 West District and an

A & P grocery garage located at 4330 West 31st Street, to

Prudential Insurance Company. The property was destroyed

by fire almost six months later, to-wit: on May 27, 1973. An

assignment of Royal’s policy RKF 63 53 78 had not been

delivered to Royal and Royal had not consented thereto.

The Enormity of the Transaction and the Sophistication

of the Parties Thereto.

CMD is in the business of purchasing and developing indus-

trial real estate. It sometimes improves and sells the property.

On other occasions it leases and manages the property. Income

received from these enterprises is for the benefit of CMD share-

holders (Recd. 209). In addition to the properties in question,

i.e., the A & P grocery warehouse at 4404 West District and

the A & P grocery garage at 4330 West 31st Street which were

part of the “Crawford Industrial Development”, CMD devel-

oped and managed industrial districts both throughout the State

of Illinois (such as the “St. Charles Industrial Development’

and the “Itasca Industrial Development’) and properties

throughout the nation (Recd. 210-211).

The sale to Prudential involved sixty-nine parcels. The total

value of the deal was in excess of $33,000,000.00 (Recd. 211,

284).

The real estate sale agreement of November 22, 1972 was

the culmination of negotiations between the representatives of

Prudential and CMD which had extended over a period of ten

months (Reed. 211). The transfer of ownership was effected

in four separate closings. On each occasion several representa-

tives of both CMD and Prudential, including experienced real

estate counsel, were in attendance (Recd. 212).

The Limited Extent of CMD’s Undertaking.

Neither the sale agreement nor the management agreement

imposed any duty upon CMD to insure or procure property in-

surance for the properties (Exh. | and Exh. H to Exh. 1).

CMD’s only obligation pertained to the assignment of exist-

ing policies and there was no obligation set forth in the sale

agreement relative to the procurement of consents to those as-

signments (Recd. 280). CMD was simply asked at the closing

of January 4, 1973, wherein title to eighteen parcels, including

the two in question, passed “to take care of the details of deliver-

ing the assignments of the insurance policies to the proper in-

surance carriers for approval and acceptance” (Recd. 220).

CMD had its own insurance manager who was charged with the

responsibility of seeking to obtain the consents of the various

insurance companies and of furnishing Prudential notice of ac-

ceptance (Recd. 220-221).

The Policy Terms.

In its answer, Royal stated that its policy of insurance was

issued “subject to all of its terms, conditions, provisions, require-

ments and limitations and not otherwise” (Recd. 34). The

policy states:

“This policy is made and accepted subject to the foregoing,

provisions and stipulations and those hereinafter stated

which are made a part of this policy. .. .” (Recd. 12, Exh.

A to complaint.)

The type of loss for which plaintiffs are provided coverage is

stated in the policy to be “Direct Loss by Fire to the property

identified in the policy.” The policy states:

“In consideration of the provisions and stipulations herein

... this company . . . does insure the insured named above

(the Trustees of the Central Manufacturing District) . . . to

the extent of the actual cash value of the property at the

time of loss, but not exceeding the amount which it would

cost to repair or replace the property . . . nor in any

event for more than the interest of the insured, against ai:

DIRECT LOSS BY FIRE... to the property descrided

herein. .. .” (Recd. 12.)

The District Court Opinion.

The District Court ruled that acceptance of Respondents’

assertions that an insurable interest could be created by the

vendor’s declaration of liability to the vendee “would serve to

deny the insurance company... its right to consent to any

assignment as provided for expressly in the insurance policy. . .”

The Court further ruled:

“An insurable interest must exist in the property itself, or

arise from some direct relationship to the property sought

to be insured.”

Rather than “wish away” the consent clause in the standard

fire policy as the opinion of the Court of Appeals did, the Dis-

trict Court considered and dismissed Respondents’ principal argu-

ment on vendor’s liability:

“Plaintiff's brief cites numerous cases standing for the

proposition that where a vendor agrees to procure insurance

for the property of the vendor and fails to do so, the vendor

has an insurable interest in that property. Those cases are

distinguishable from the present at least to the extent that

in the present case the fire insurance was already procured,

and the vendor failed to perform its promise to seek the

consent to the assignment of a third party wholly distinct

from the parties to the transaction.

“While it is true that an insurable interest is predicated

upon the economic benefit of the continuing existence of the

property in question, or the economic loss due to the de-

struction of the property, that statement of the law, stand-

ing by itself, is inapplicable in light of the additional facts

presented in this case as well as other rules of law relating

to an insurance carrier’s right to consent to assignments of

its policies.”

Supported by strong Illinois law the Court continued:

“On the face of the policy issued by Royal Indemnity to

CMD covering the warehouse and garage is the legend:

‘“Assignment of this policy shall not be valid except with

the written consent of his Company.”’ Courts have uni-

formly upheld such express provisions in a fire insurance

policy. See Pfeffer v. Farmers State Bank of Schaumburg,

263 Ill. App. 360, Klefstad v. American Central Ins. Co.,

207 F. 2d 288 (7th Cir. 1953).”

In concluding, the Court stated on page 1081:

“In light of the express provision for the written consent

of the insurance company to any assignment of rights under

a policy, and in light of the insured’s total failure to perform

its promise to seek the insurance company’s consent to the

assignment, the supposed liability of CMD to Prudential

is not tantamount to the creation of an insurable interest in

CMD. An insurable interest must exist in the property itself,

or arise from some direct relationship to the property

sought to be insured. The interest cannot arise from facts

wholly extraneous to and separate from the destroyed prop-

erty—an insurable interest in CMD in the destroyed prop-

erty cannot arise by virtue of CMD’s own misfeasance in

performing its undertaking to procure Royal Indemnity’s

Noting the attempt of the Respondents to exculpate itself | consent to the assignment of CMD’s rights under the policy

from its own misfeasance at the expense of the Petitioner and | to Prudential.”

the important right to consent, the Court held on page 1080: |

. . that where a named insured, under the terms and

conditions of a fire insurance policy, transfers by deed

pursuant to a real estate agreement all of its right, title,

and interest in the property covered by the insurance policy

to a transferee, and immediately thereafter undertakes to

procure a consent from the insurer to an assignment of its

rights under the policy to the transferee, and then fails

to perform that undertaking, the named insured will be

deemed to have lost any insurable interest in the property

covered by the insurance policy as of the time of delivery

of the deed. A rule of law, such as that proposed by the

plaintiff, which would create an insurable interest in the

transferor by virtue of his liability to the transferee for

failure to perform his undertaking to procure an insurance

company’s consent to an assignment would serve to deny

the insurance company of its right to consent to any as-

signment as provided for expressly in the insurance policy,

and would serve to exculpate the transferor from liability

for its own misfeasance or breach of contract with the

transferee at the expense of the insurance company. (Em-

phasis added. )

ARGUMENT.

RESPONDENTS’ CONVEYANCE OF PROPERTIES DIVESTED

ANY INTEREST PROTECTED BY THE POLICY OF IN-

SURANCE. THE COURT OF APPEALS’ REFUSAL TO BE

BOUND BY ILLINOIS LAW IS VIOLATIVE OF THAT PRIN-

CIPLE FOUNDED IN CONSTITUTIONAL SAFEGUARDS

THAT, FOR PURPOSES OF DIVERSITY JURISDICTION,

A FEDERAL COURT IS IN EFFECT ONLY ANOTHER

COURT OF THE STATE.

A. Preliminary—Proper Focus.

There has been a serious mistake. Although the question of

insurance law here presented may appear complex, it is nonethe-

less totally clear. Petitioner respectfully submits that the Court

of Appeals misunderstood the issues presented and has thereby

rescued CMD and Prudential from there astonishingly careless

actions to the detriment of Petitioner and at the expense of dis-

torting one of the most basic concepts of insurance law, insurable

interest. It is upon this concept that the Court of Appeals

reversed the well reasoned opinion of the District Court and

transformed a fire insurance policy, a property policy, into an

errors and omissions policy, a liability policy. It appears that the

Court of Appeals was so overwhelmed by the so-called equities

for the Respondents that it was dissuaded from accepting and

applying Illinois law.

This case is clearly an instance of a growing jurisprudential

conflict between the federal and state Court systems. It again

appears as it did prior to the Supreme Court ruling in Erie R.

Co. v. Tompkins, 304 U. S. 64, 58 S. Ct. 817, 82 L. Ed. 1188

(1937) that in diversity cases there are two separate systems of

justice—that of state law as established by the state Court—

and that created by the federal Court’s application of those

notions of justice more consonant with that Court’s predilec-

tions.

This case must be placed in proper perspective. Petitioner has

no obligations beyond those contractually assumed and the fact

is that Petitioner simply did not agree to afford coverage for

the claimed loss. The policy insures against “Direct Loss by

Fire . . . to the property described”. The building damage

was not a direct loss to CMD. Its loss, if any, flowed from its

negligence to advise Prudential of the failure to obtain consent.

Incredibly—in view of CMD’s vast size and financial holdings

and the sophistication of its personnel as described in their

depositions and as evident in the legal draftsmanship of the pur-

chase and sale agreement of November 22, 1972—the loss was

self-inflicted.

The insurance industry, an important part of both the state

and national economy, will not, and cannot be afforded less than

the rights of other citizens. Insurance contracts must be con-

strued as written and not according to Court preference.

The policy plainly provides that assignment of the policy

“shall not be valid except with the written consent of Royal”.

The provision is valid. Moreover, it means what it says. Pfeffer

v. Farmers State Bank of Schaumburg, 263 Ill. App. 360. That

the point is beyond dispute was noted by the Pfeffer Court at

263 Ill. App. 370:

“No one of (the authorities cited) holds and (we doubt

whether a case can be found in the books holding) that in a

case like this an insurance company would be bound unless

it gave consent to the assignment. This policy expressly

provides that the insurance company shall not be bound

without its consent.” (First parenthetical statement sup-

plied. )

Consent is essential because, as further noted in Pfeffer, the

parties thereby create a “new and valid contract”. No insurer

may properly consent to assignment of a policy to a new owner

after the property has been damaged or destroyed by a covered

peril any more than an insurer could retroactively write a new

policy for such owner after loss. The element of risk of loss,

essential to the validity of insurance, would be non-existent.

The concept of insurable interest, i.e., the derivation of

pecuniary benefit from the existence of a building or financial

loss by reason of its damage, cannot be viewed in a vacuum.

Both the terms of the contract and common sense must be taken

into account. The interest must be in the property itself so that,

as Clearly stated in the policy, the loss is a direct loss from the

destruction of that property. The loss claimed by CMD was

remote, indirect and consequential—the result of negligence.

Absent that negligence, the loss of the building was nothing

to CMD.

The need for a direct connection between the subject matter

of the insurance and the party on whose behalf the insurance

was effécted was recognized long ago in Lucena v. Craufurd,

2 B. & P.N. R. 269, 324, 127 Eng. Rep. 630, 651 (1805):

“, . .(I)f moral certainty (or expectation) be a ground of

insurable interest, there are hundreds, perhaps thousands,

who would be entitled to insure. First the dock company,

then the dock master, then the warehousekeeper, then the

porter, then every other person who to a moral certainty

would have anything to do with the property, and of

course get something by it.”

The alternative to this common sense approach is chaos.

We are dealing with property, not liability, insurance. It is

common practice for insurance agents and brokers to carry

errors and omissions insurance to cover exposure to legal lia-

bility arising out of their work on behalf of their customers but

obviously they do not carry property insurance upon the prop-

erty of their customers. They clearly have no insurable interest

in such property even though under certain circumstances they

may incur liability to the property owner as a consequence of

the destruction of the property. Similarly, physicians and

surgeons carry a form of liability insurance known as malpractice

insurance. Obviously they do not carry accident and health

and life insurance policies upon their patients. Clearly they do

not have an insurable interest in the lives of such patients. The

same may be said with respect to lawyers who carry professional

liability insurance covering their own potential liability to their

clients. They do not carry insurance in their names upon the

property of their clients.

The Court of Appeals’ brusque treatment of the District

Court’s Memorandum of Decision published as Prince v. Royal

Indemnity Company, 404 F. Supp. 1076 (1975), as an “unpub-

lished memorandum” is unfoundec. Indeed, rather than “no

authority in Illinois law” supporting the District Court's view,

as stated by the Court of Appeals, there is absolutely no Illinois

law in support of the position adopted by the Court “by analogy”

in an effort to circumvent the consent clause in the standard

fire policy long recognized and upheld by Illinois authority and

twist and turn the concept of insurable interest at its whim to

convert a property insurance policy into an errors and omission

policy.

B. The Court of Appeals’ “Distinction” of the Mlinois Rule

on Insurabie Interest Is Mlusory; That Court Simply Sub-

stituted Its Own Opinion for Mlinois Law Which Here

Required That Judgment Be Entered in Favor of Petitioner.

Petitioner has no quarrel with the general rule that one has

an insurable interest in property who derives a pecuniary or

real benefit from its existence, or who would suffer financial

loss by reason of its damage or destruction; Petitioner empha-

sizes that this interest must be in the property itself; that is, an

interest in the property, which interest is of continuing pecuniary

value to the person by reason of the existence of the property

and which will be directly lost by the destruction of the prop-

erty. Respondents are asserting an interest not in the property,

which would support an insurable interest necessary to the

validity of a property insurance policy, but rather an alleged

exposure to personal liability arising out of negligence wholly

unrelated to the property itself, which conceivably would be

sufficient to support an insurable interest under a policy of

liability insurance.

Petitioner respectfully submits that the opinion of the Court

of Appeals is incorrect—that it is inconsistent with Illinois deci-

sions which have been based upon the question here presented.

The applicable Illinois law is not open to construction.

In our opinion, if this matter was presented before the Illinois

Supreme Court the view of the District Court would readily

prevail.

The concept of insurable interest camnot be viewed in a

vacuum. The interest must be in the property itself; as clearly

stated in the policy, the loss must be a direct loss from the

destruction of the property by the peril insured.

The fundamental principle here controlling was set forth

by the Illinois Supreme Court in //linois Mutual Fire Insurance

Co. v. Andes Insurance Co., 67 Ill. 362, 363 (1873):

“.. . if the assured has parted with all his interest in the

subject insured before the loss happens, he cannot recover,

for the reason that the contract is regarded as one for

indemnity, and he has sustained no loss or damage.”

In accord with both the contract provisions and the nature of

the policy, Illinois has consistently required such a relationship

to the property that a happening adversely affecting the property

be of direct economic disadvantage to the plaintiff. The loss

protected is oss “by the destruction of the property”. Lieber-

man V. Hart, ord Fire Insurance Co., 6 lll. App. 3d 948, 287

N. E. 2d 38 (1972).

The position of Illinois was set forth with unmistakable

clarity in Patterson v. Durand Farmers Mutual Fire Insurance

Co., 303 Ill. App. 128, 24 N. E. 2d 740 (1940). The effect

of Patterson is that the tendency of modern decisions to relaxa-

tion of the stringency of earlier cases must not be misconstrued

to permit the alteration of the very nature of the contract. The

requisite relationship to the property must be present. There

must be a “fixed, cognizable estate or interest in the property”

so that loss of the property is a “direct pecuniary loss to

plaintiff’. The Court further stated:

“This insurance policy did not insure the dwelling which

was destroyed by the fire, but insured appellee against all

direct pecuniary loss which she might suffer by reason of

its destruction.

“An insurable interest at the time of the issuance of a policy

of insurance and at the time of the loss are essential to the

validity of an insurance peiicy . . . and the Courts hold

that where the insured has no insurable interest, as policy

issued to such person is void as against public policy.

“. . . (the officers of the defendant) had no lawful right

to pay out the funds of their mutual company in satisfac-

tion of a claim for a loss to a person who had no insurable

interest in the property destroyed.”

Stated another way, the damage to or destruction of the

premises must ipso facto be a loss to Respondents. As noted

in Home Insurance Co. v. Mendenhall, 164 Ill. 458, 45 N. E.

1078 (1897) upon which the Court of Appeals relied, although

an interest to be insurable need not be an “existing jus in re nor

jus ad rem,” there must be “such a relation to the property”

that the destruction of the property “by the peril insured against

involves pecuniary loss” to the claimant. Illinois has never

deviated from this requirement of a fixed, cognizable estate or

interest in the property which cannot be divested.

In Mendenhall, plaintiff whose father had purchased the

property at a partition sale, had such a vested interest. He was

in possession and control of the property and further his interest

was certain to ripen into absolute title upon the issuance of the

deed. The Court stated at 164 Ill. 463:

“... he (plaintiff) hold(s) such a relation to the property

that its destruction by the peril insured against involves

pecuniary loss to him...

“His title it is true at the time was one in expectancy, but

under certain conditions was sure to ripen into one abso-

lute. Where the title of one is such, though not in fee,

that he would suffer a loss or damage by the destruction

of the premises, he may protect his interest, whatever may

be the nature of it, by insurance, and thus it follows that

an insurable interest is not always a fee simple title.”

(Emphasis supplied. )

This is the point of focus—the common thread running

through the Illinois decisions. The relationship to the property

must be such that loss is suffered by the destruction of that

property. The Court of Appeals’ “distinction” of Mendenhall

is no more than a contrived device designed to contravene the

Illinois rule.

In Griffin v. Pfeffer Lumber Co., 285 Ill. 19, 120 N. E. 583

(1918) the insurable interest was that of a lessee in possession.

In Fray v. National Fire Insurance Co., 341 Ill. 431, 173 N. E.

479 (1930), plaintiff was a trustee with “a legal interest in the

property” enabling him to “insure it as his own and in his own

name”. In Home Insurance Co. vy. Peoria, P. U. Ry. Co., 78

Ill. App. 137 (1889), the insured was in the same position as

a warehouseman or custodian who has a personal interest in

the property. The plaintiff in Danvers Mutual Fire Insurance

Co. v. Schertz, 95 Tl. App. 656 (1900) had, upon his purchase

of the property, conveyed the same to his wife for convenience,

‘ut remained in possession, received the profits, and claimed

absolute ownership. In Downs v. Michigan Commercial Insur-

ance Co., 157 Ill. App. 32 (1910) and Capps v. National

Union Fire Insurance Co., 318 Ill. 350, 149 N. E. 247 (1925)

plaintiff was the purchaser of the property and was in possession

under a bond for deed. Plaintiff in Welch v. Northern Assur-

ance Co., 223 Ill. App. 77 (1921) was the majority share-

holder of the corporation which was in possession of and owned

the building. Additionally, plaintiff held title and was guarantor

of the corporation’s indebtedness. The insurable interest in

Whelan v. Massachusetts Bonding & Insurance Co., 205 Ill.

App. 122 (1917), pet. lv. app. den. was the right of plaintiff,

the pastor of a church, the title of which was in the Catholic

bishop, to use and enjoy the premises. This was such a “rela-

tion to the property” that destruction of the property was in

itself a pecuniary loss to him. The right was, as noted by the

Court “a sufficient property right to constitute ownership”.

Illinois law is capsulized by Agricultural Insurance Co. Vv.

Clancey, 9 Ill. App. 137 (1881) wherein the property secured

a mortgage for which claimant was responsible and additionally

the claimant was a trustee for the mortgagee. The essential ele-

ment is that the interest, to be insurable, must be in the prop-

erty itself. The Court noted that although it was not necessary

that there be a present property right per se, there must be “such

a connection . . . between the subject matter . . . and the party

in whose behalf the insurance has been effected” that there is

“loss to him from the occurrence of an injury to it.”

CMD had no interest in the property. The loss was solely

the result of CMD’s exposure to personal liability as the result

of CMD’s negligence.

In supporting its contention of an insurable interest on page

6 of its opinion, the Court quotes 3 Couch on Insurance 2d

Sec. 24:13. An examination of this section supports the

Petitioner’s contention:

. . . The right of interest must be such as the law will

recognize and protect, that is, of such a character that the

destruction of the property will have a direct, and not a

mere remote or consequential, effect upon it. The interest

must be direct and immediate, as distinguished from

remote and consequential, and it should not be based on

a bare possibility.

While referring to the broad language contained in Couch on

Insurance Sec. 24.13, the Court of Appeals failed to consider the

more particular language contained in Couch on Insurance Sec.

24:100 and Sec. 24:101 as well as 4 Appleman, Insurance Law

and Practice Sec. 2241, 22 Illinois Law and Practice: Insurance

Sec. 307 and the Illinois Cases contained therein:

COUCH ON INSURANCE, § 24:100 and § 24:101.

§ 24:100. Vendor and purchaser—Vendor under contract

to sell.

“A vendor, or one who has contracted to convey to

another either real or personal property, and who retains

the legal title until the conditions are performed which will

entitle the purchaser to a conveyance, retains title as

security and has an insurable interest in the property to

the time the conveyance is made, when the interest ceases.

§ 24:10!1. Vendor after delivery of deed or transfer of title.

“After a vendor has absolutely parted with all owner-

ship, title, and interest in the property sold, so that all risk

of loss rests on the vendee and no injury will result to the

vendor from the destruction of the property, the vendor

has no insurable interest therein.”

4. APPLEMAN, INSURANCE LAW AND PRACTICE.

“$2241. Transfer of Interest or Sale of Property.

“A fire contract, or other property insurance, is con-

sidered a personal contract in that the hazards which the

company elects to assume are hazards concerned with the

contracting individual—his care, moral qualities, and the

like—the insurance running to the individual rather than

upon the property. If the insured, then, parts with all in-

terest in the property prior to loss, it is not covered. It is

not necessary to have a specific by-law to the effect that a

transfer or sale of the property avoids protection; a sale by

the insured between the date of the policy and the date of

loss is considered to avoid protection.”

22 ILLINOIS LAW AND PRACTICE, INSURANCE, § 307.

“Tt has been held that an insured cannot recover under a

fire policy unless he has an interest in the property at the

time of the loss, and that an absolute alienation works a

forfeiture, whether or not so stipulated in the policy, if

ownership of the property reiiains out of the insured at

the time of the loss.”

The foregoing rule of law, followed and applied by the

Illinois courts, similarly obtains in other jurisdictions. In Estes

v. Great American Ins. Co., 112 S. W. 2d 153 41938), the

Missouri Court of Appeals held that a fire insurance contract

is an indemnity contract; that the insured must have an in-

surable interest, both at the inception of the risk and at the time

of loss; and that persons who are not parties to the contract

could not recover thereunder.

In Shadid v. American Druggist Fire Ins. Co. (Okla.), 386

P. 2d 311 (1963), the Supreme Court of Oklahoma found

that the insured under a fire policy conveyed all of her title

and interest in a drug store, and no longer had an insurable

interest. Similarly, in Pressly v. America, 14 N. C. App. 561,

188 S. E. 2d 734 (1972), the Court held that there at the time

of the fire the named insured in a fire policy did not hold record

title to the dwelling described in the policy, and the record title-

holder was not named in the policy, neither the named insureds

nor the record titleholder were entitled to recover the proceeds

of the policy. See also Wriedt v. Beckenhauer, 183 Neb. 311,

159 N. W. 2d 822 (1968); Marcuse v. Upton, 9 La. App. 28,

118 So. 790 (1928).

In Pappas v. Insurance Co. of State of Pa., 54 Tenn. App.

640, 393 S. W. 2d 298 (1965), a father transferred property

to his six year old son. The transfer was motivated by his

fear that his wife would dissipate his estate. The father had in-

surance on the property but did not transfer the insurance

policy to his son. The Court said:

“In the case at bar Dr. Pappas on his own volition, trans-

ferred this property to his minor son without advising the

insurance companies. There seems to be little doubt he

knew the transfer of his property divested him of his in-

terest for one of the reasons he gave for making the

transfer was to put the property beyond the reach of his

wife. As we see it, his only rights now in the property

would be the possibility of inheritance, under certain cir-

cumstances provided he survives his son. We cannot say

this mere possibility would be one from which he would

derive a pecuniary benefit or advantage from the prop-

erty’s preservation neither can we say the destruction of the

property would be a loss to Dr. Pappas. The burning of the

house was undoubtedly a loss to the one who may be

affectionately concerned about his son’s property, we do

not see that he has any loss by the destruction of the prop-

erty which would be insurable in his own name.”

In Lumberman's Mutual Insurance Company v. Edmister,

412 F. 2d 351 (8th Cir., 1969), the insured transferred his

legal title to the premises. The Court rejected the insured’s

claim of insurable interest, notwithstanding the following facts:

(a) The insured was in possession and actually occupy-

ing the premises;

(b) The insured was using the premises as a head-

quarters for tax service, farming and an anticipated hous-

ing development venture;

house; and

(d) The insured had an inforcible vendor’s lien worth

at least $200.00 against the dwelling.

Clearly, the insured in that case had a more direct relation-

ship with the insured premises than did CMD in the present

case. This case is in direct conflict with the opinion of the

Seventh Circuit Court of Appeals in the instant case.

It is respectfully submitted that under the foregoing authori-

ties and applicable rules stated herein, it is clear that the Re-

spondents had no insurable interest in the property on the date

of loss. Respondents had no legal or equitable interest in the

premises, nor did they have an interest that could have been

insured in their own names. Since the terms of their conveyance

did not preserve an insurable interest, they now may not rely on

their gratuitous promises to obtain the consent of the Petitioner

to the assignment of the policy as creating an alleged insurable

interest.

C. Respondents Did Not Sustain the Required “Direct” Pecu-

niary Loss. The Indemnity Which Respondents Sought

for Indirect Loss Is Afforded Only by “Errors and Omis-

sions” Coverage; It Is Not Afforded Under the Policy of

Property Insurance.

To constitute an insurable interest in property, the law is

clear that such interest must be one which the law will recog-

nize and protect. It must be of such a character that the destruc-

tion of the property will have a direct and not a mere remote,

or consequential, effect upon it. On Page 7 of its opinion (A-8),

the Court of Appeals rejected without authority, Petitioner’s con-

tention that the Respondents’ loss was an indirect loss.

CMD sustained no direct loss by fire. That loss was sustained

by Prudential, the sole and unconditional owner of the property

on the date of the fire. The loss of CMD was the remote, indirect

and wholly consequential result of the fire. It was caused, not

by the fire, but by negligence, i.e., the failure of CMD to seek

Royal’s consent to a new contractual relationship and CMD’s

failure to properly advise Prudential of its success or failure in

this regard.

The policy plainly states:

“.. , this company . . . does insure the insured named

above . . . against all DIRECT LOSS BY FIRE .. . to

the property described herein. . . .”

The contract is the law between the parties. Clear and un-

ambiguous terms such as the requirement that loss by a

“Direct Loss” must be given effect in accord with their plain,

ordinary and popular meaning. As was noted by Judge Cardozo

in Bird v. St. Paul Fire & Marine Insurance Co., 224 N. Y. 47,

120 N. E. 86 (1918), loss which is not direct, but which is

indirect or consequential, such as that brought about by an

intervening proximate cause, is simply not within the purview

of coverage.

Additionally, the requirement that loss be direct is funda-

mental to the very nature of the policy. The policy was not lia-

bility insurance which would indemnify the insured “against

loss from his own negligence . . .” Couch on Insurance 2d,

Sect. 44:2; Principles of Insurance, Mehr and Cammack, p. 373.

Rather this is property insurance and the hazard therein con-

templated is damage or the destruction of the insured’s prop-

erty. City of Nokomis v. Smith, 74 Ill. App. 2d 211, 219 N. E.

2d 776 (1966). The distinction was made in General Insurance,

Magee, 4th Edition at page 333:

“In contrast to direct damage insurance, which indemnifies

the insured when loss is the outgrowth of injury to his own

person or property, liability insurance policies do not cover

loss or damage to the person or property of the insured, but

cover instead the liability for damages imposed by law.”

It is axiomatic that indirect loss is not compensable under a

policy of property insurance. The fact of loss, standing alone—

irrespective of the reality or enormity thereof, is immaterial. For

coverage to be afforded, the loss must be the direct result of fire.

In In Re Reynolds Estate, 94 Vt. 149, 105 A. 60 (1920),

the plaintiff holders of a mortgage upon premises owned by the

insured and adjacent to the premises upon which the insured

building burned, were held, despite the economic detriment

suffered in consequence of the loss of the property, to have no

insurable interest in the property destroyed. The Court stated at

109 A. 63:

“. ., while great liberality is indulged in in determining the

question whether one has anything at hazard in the sub-

ject matter of the insurance, he must have such a right or

interest therein as the law will recognize and protect. This

must be of such a character that the destruction of the

property will have a direct effect upon it and not a remote

or consequential effect upon it. Merrett v. Farmers Insur-

ance Co., 42 Iowa 11. Since the $500.00 mortgage did

not cover the buildings, the holders thereof had only an

indirect and remote interest therein.” Accord: 4 Apple-

man, Insurance Law and Practice, Sec. 2123, p. 40 (1941);

Couch on Insurance 2d, Sec. 24:13 (1960); 29 Am. Jur.,

Insurance, Sec. 439.

Respondents’ attempt to find a basis for recovery in any uncer-

tainty which might be of economic disadvantage to Respondents

is utterly unfounded. The requirement that loss be Direct is

absolute.

Contrary to the interpretation of the Court of Appeals, the

purported loss of Respondents is a remote, indirect and wholly

consequential result of the fire. If in fact, liability to Prudential

exists at all, it was caused not by the fire but by the self asserted

negligence of the Respondents in not procuring the consent of

the Petitioner to the assignment of all right, title and interest in

and to the policy to Prudential following its sale of the property

to Prudential. The Respondents sought and were rewarded by

the Court of Appeals a self proclaimed liability under a property

insurance policy. The Respondents’ case is the collusive effort

by the Respondents and Prudential in nullifying the right of the

Petitioner to grant or withhold its written consent to an assign-

ment of its policy.

The Court of Appeals could not rule that the Respondents

suffered a direct financial loss because of the occurrence of a

peril insured against in the standard fire policy in question. The

policy covered the risk of fire, not negligence. Respondents had

nothing to lose by the destruction of Prudential’s properties and

its action did not cause the properties to be destroyed by fire.

If the Prudential had been named as an insured in the policy by

assignment with the consent of the Petitioner prior to the loss,

Respondents would have suffered no loss and received nothing.

The requirement that the loss be direct is absolute.

The opinion by the Court of Appeals foists an additional

risk upon the insurer other than risk of destruction by fire. The

Court of Appeals has ordered the Petitioner to indemnify an

unbargained for risk—the risk that the insureds would be negli-

gent in gratuitously agreeing to obtain consent to assignment of

the policy. Neither party could possibly have contemplated the

existence of coverage to include a risk of such liability of CMD

to Prudential as the entire transaction involved an amount well

in excess of $30,000,000.00.

An essential flaw in opinion of the Court of Appeals is its

equation of an agreement of a vendor or broker to have the

assignment of the policy consented to by the company with an

agreement of a vendor or broker to insure or cause to be in-

sured. The essential difference, as noted by the District Court,

is that the agreement of a vendor or broker to obtain company

consent to an assignment of the policy requires more than an

action by the vendor or broker. It requires the consent of a

third party; namely, the insurance company, as to which and

over which the vendor or broker has no control.

As the District Court observed, all of the case law cited by

the Respondents deals with damages for failure to fulfill an

agreement to procure insurance. The instant case is distinguish-

able in that the Respondents recognized the validity of the con-

sent provision in the insurer’s contract and made a gratuitous

promise to obtain the consent of the Petitioner to the assign-

ment of the policy to a third party. The contractual right of the

company to consent to an assignment of its policy to a new

owner of the property described in the policy before the oc-

currence of the destruction of the property, has been effectively

and totally abrogated and denied by the Court of Appeals.

The contractual right of the Petitioner to consent to assign-

ment of its policy to a new owner of the property described in

the policy, before the occurrence of the destruction of the prop-

erty by a peril insured against in the policy, is a very real and

necessarily vital one, and, as such, is one that the Petitioner is

not only justified in preserving but is required to preserve.

The practical effect of the opinion of the Court of Appeals

is to wholly obliterate and nullify that important and essential

contractual right of consent of the Petitioner, as to which and

over which neither CMD nor Prudential had or has control.

This involves a fundamental constitutional right of lawful con-

tract and its destruction, as is herein sought to be accomplished

by CMD, should not be countenanced.

In Pfeffer v. Farmers State Bank of Schaumburg, 263 Ill.

App. 360 (1931), the Court said:

“Defendant next contends that the consent of the insurance

company to the assignment of the insurance contract was

not necessary in order to protect plaintiff's interest. This

contention is based on the well known rule that a contract

of insurance is construed most strongly in favor of the in-

sured. Defendant cites Endelman v. American Ins. Co.,

297 Ill. 222; Am-rican Smelting & Refining Co. v. Funker

Hill & Sullivan Min. & Con. Co., 248 Fed. 172, with

many other cases. It is, we think, wholly unnecessary to

review these (the Defendant’s) cases. Not one of them

holds (and we doubt whether a case can be found in th2

books holding) that in a case like this an insurance com-

pany would be bound unless it gave consent to the assign-

ment. This policy expressly provides that the insurance

company shall not be bound without its consent.”

The same rule was applied in a case by the same Court of

Appeals for the Seventh Circuit in Klefstad v. American Cen-

tral Ins. Co., 207 F. 2d 288 (1953). The Court stated at page

289: |

“Neither do we need to set forth or discuss the numerous

legal grounds upon which defendants rely in support of

the judgment. This is so for the reason that plaintiff, ir-

respective of all other considerations, is not, in our judg-

ment, entitled to maintain the instant suit because he was

not named as an insured and, so far as we are aware, the

contracts contain nothing which indicates they were made

for his benefit or protection. In fact, he was total stranger

to the insurance policies issued by the defendant companies

to the Major company, in which the latter was the sole

insured or beneficiary. Reference to a few of the numerous

Illinois cases leaves no room for doubt but that such is the

rule and that this is an appropriate case for its application.”

The basic rule which affirms that no assignment of the policy

is valid without the consent of the company is the obvious rea-

son that CMD and Prudential have elected to take the extreme

action of “recission” of the sale and institute suit upon the

policy in the name of CMD. It is this effort on their part to

_—, ircumvent this basic rule of law which forms the essence of

the case. are seeking to do is convert a property in-

surance policy into a po jability. insurance.

The Court of Appeals’ opinion has pendent nS

carelessness of two highly experienced and large property owners,

CMD and Prudential from the necessity of obtaining the written

consent of the insuring company prior to loss of an assignment of

property insurance upon property which was the subject of sale

to a new owner. The Court of Appeals, despite the evident

sophistication of Prudential, CMD and their attorneys and rep-

resentatives, has cast aside the usual consequences of the failure

of these parties to abide by the basic legal aspects of the

purchase and sale of real estate. Cast aside is the duty on the

purchaser to make arrangements under which the insurer either

consents in advance to an assignment of the policy from the

seller to the purchaser to be effective upon the conveyance of

title to the property from the seller to the purchaser or to make

arrangements with an insurer to provide interim coverage upon

the property for the interim period.

The oral, apparently casual, request at the fourth closing, that

CMD “take care” of seeking Petitioner’s consent to the assign-

ment of its policy to Prudential was the sole basis upon which

CMD’s liability was predicated. Simply stated, CMD had under-

taken a responsibility and, as any volunteer, was bound to dis-

charge that undertaking in a careful manner. CMD was obli-

gated to seek Petitioner’s consent within a reasonable time and

to, again within a reasonable time advise Prudential of Petition-

er’s decision.

It is apparent that the Respondents did not notify the Pru-

dential that the consent had been obtained. Surely the principal,

The Prudential Insurance Company, had a duty to inquire

whether the consent had, in fact, been obtained. For a period of

almost six months Prudential never received any assurance that

the insurer’s consent had been obtained by its purported agent,

and made no effort whatsoever to determine whether it had, in

fact, been obtained.

The Court of Appeals’ decision had blessed Respondents’

efforts at submitting a liability claim to a property insurer and

with a twisted reading of liability case on Page 7 (A-8) of its

opinion has denied this property insurer two important rights

afforded to liability carriers; (1) the right to defend, and (2)

— ight to interpose an affirmative defense of contributory

The Court of Appeals has condoned the determination of

alleged liability and the extent of alleged liability by the

Respondents without the advice or participation of the insurer.

Respondents’ extreme action in “acknowledging” liability and

its success in foisting this liability on its fire insurance carrier

is without precedent by any authority in any state.

Each case cited on page 7 of the Court of Appeal’s decision

(A-8) involves situations wherein a liability insurer unjustifiably

refused to defend a covered claim against its insured, which

unjustified refusal operated as a waiver of policy conditions and

permitted the insured to make reasonable compromise of its

liability, and on such reasonable settlement of claim, the liability

of the insurer became fixed and liquidated.

This unfounded analogy to principles of liability insurance

law, has no application to the present property damage claim

and strongly supports Petitioner’s position that the opinion of

the Court of Appeals has erroneously transformed a property

insurance policy into a liability insurance policy.

Il.

THE REFUSAL TO ACCEPT THE BINDING PRINCIPLES OF

ILLINOIS LAW IS AN UNCONSTITUTIONAL ABROGA-

TION OF THE REQUIREMENT THAT IN DIVERSITY

CASES STATE LAW CONTROLS.

A federal Court is, for purposes of diversity jurisdiction, to

be considered simply another Court of the state. Erie R. Co. v.

Tompkins, 304 U. S. 64, 58 S. Ct. 817, 82 L. Ed. 2d 1188

(1937). Derogation of this rule has practical implications rela-

tive to the proper administration of justice in federal Courts.

The United States Constitution reserves the autonomy and in-

dependence of the states—an independence which extends to

the judiciary. Any interference therewith except as permitted

by the Constitution, is an invasion of the state and to that extent

a denial of its independence. Fidelity Union Trust Company v.

Field, 311 U. S. 169, 85 L. Ed. 2d 109, 61 S. Ct. 176 (1940).

The opinion of the Court of Appeals speaks for itself. It is

readily apparent that the Court considered the applicable state

law “regressive”. This aversion is no justification for rejection

of state law as prescribed by the state’s highest Court. State law

must be followed “however superior (a different rule) may ap-

pear from the view point of general law’. West v. American

Telephone and Telegraph Company, 311 U. S. 223, 61 S. Ct.

179, 85 L. Ed. 2d 139, 144 (1940).

The purpose of Section 34 of the Judiciary Act (Title 28,

Section 1652, U. S. C.) is to avoid the maintenance within a

state of two divergent or conflicting systems of law, one to be

applied in the state Courts, the other to be availed of in federal

Courts in cases of diversity of citizenship. The Court of Appeals’

decision constitutes both an unreasonable and unlawful dis-

crimination against those subject to federal jurisdiction and an

abrogation of the right of property in violation of the guarantee

of due process under the Fifth Amendment to the United States

Constitution. The unfairness of refusing to treat all litigants

equally because of the fortuitous circumstances of diversity is

compounded by the destruction of petitiouer’s contractual rights

without due process of law. Erie R. Co. v. Tompkins, 304 U. S.

64, 58 S. Ct. 817, 82 L. Ed. 2d 1188 (1927); Guaranty Trust

Co. v. York, 326 U. S. 99, 65 S. Ct. 1464, 89 L. Ed. 2d 2079

(1945); Home Insurance Co. v. Dick, 281 U. S. 397, 50 S. Ct.

338, 74 L. Ed. 2d 926 (1929); Hartford Accident & Indemnity

Co. v. Della & Fine Land Co., 292 U. S. 143, 54 S. Ct. 634, 78

L. Ed. 2d 1178 (1933).

The ruling here constitutes both an unreasonable and unlawful

discrimination and an abrogation of the right of property in

violation of the guarantees of due process under the Fifth

Amendment to the United States Constitution.? The insurer here

was unconstitutionally discriminated against under a dichotomy

not recognized by state law by a deprivation of a defense to

which it would have been entitled had the litigation not been

instituted in the federal Court. Additionally, the unfairness of

refusing to treat all litigants equally because of the fortuitous

circumstances of diversity is compounded by the destruciion of

petitioner’s contractual rights without due process of law. This

creates the very dichotomy and unconstitutional discrimination

condemned by this Court in Woods v. Interstate Realty Co.,

supra, wherein this Court stated at 93 L. Ed. 2d 1527:

“... a right which local law creates but which it does not

supply with a remedy is not right at all for purposes of

enforcement in a federal court in diversity cases . . . where

in such cases one is barred from recovery in the state court,

he should likewise be barred in the federal court.

The contrary result would create discriminations against

citizens of the state in favor of those authorized to invoke

the diversity jurisdiction of the federal court.”

2. While the Fifth - yt - pnt pa Coieeten i

does not contain an explicit an protection clanse

such protection is derived from the “due process” clause

of the amendment. ing v. Sharpe, 1954, 347 U. S. 497, 74 S. Ct.

693, 98 L. Ed. 2d 884.

CONCLUSION.

Petitioner insured only the risk of destruction of property by

fire. Respondents have succeeded in foisting an additional,

unbargained-for risk upon Petitioner—the risk that Respondents

would be negligent in obtaining its consent to assignment of the

policy. Respondents sought coverage for nothing other than a

liability claim—a risk for which a fire insurer provides no

protection—and in doing so are denying the Petitioner those

important rights which are afforded the liability carriers, i.e.,

the right to defend and the right to interpose an affirmative

defense of contributory negligence. Moreover, Respondents by

their claim, have attempted to vitiate Petitioner's right to

consent or withhold its consent to assignment of the policy.

The point controlling is that Respondents did not suffer a

direct financial loss because of the occurrence of the peril

insured against in the standard fire policy. The policy covered

only the risk of fire and CMD, other than for its negligence,

had nothing to lose by the destruction of Prudential’s property.

CMD was completely out of the picture when the fire occurred.

The fallacy of CMD’s argument is demonstrated by assuming

that Prudential had been named as an insured in the policy by

Petitioner's consent to assignment prior to loss. It is obvious

that in such circumstances Prudential would have recovered

under the policy and plaintiffs, having suffered no loss, would

have received nothing. Respondents’ interest with Prudential

out of the picture are no different. The assertion by Respondents

is entirely unprecedented. The controlling principle was stated

in Marcuse v. Upton, 9 La. App. 28, 118 So. 790 (1928):

“(It is) the fundamental law of fire insurance which is

a contract, not of speculation, but of indemnity alone,

(that) a party insured loses all title or interest in a policy

the instant he parts with ownership or interest in the thing

insured and has no longer any interest in the policy

susceptible of assignment by him.”

Based upon a reading of the Court of Appeals’ opinion, one

may pose the question, of what the Court of Appeals would rule

if the Trustees of this huge Massachusetts Trust, known as the

Central Manufacturing District, had in fact carried liability

insurance (as one might expect of them); i.e., errors and omis-

sions insurance. Would the Court of Appeals exculpate the

errors and omissions insurer; i.e., the liability insurer, and

shift its possible liability to the Trustees’ former property

insurance carrier? It is certain that they would not. Here the

Trustees chose not to incur the premium expense of errors and

omissions insurance, but rather chose to be self insurers of such

liability exposure, and in effect pay to themselves the premium

incident to such liability coverage. It is submitted that this

presumably informed election on the part of the Respondents

should not constitute justification for shifting responsibility to

this property insurance carrier.

The rejection by the Court of Appeals of Illinois law has

singled out and discriminated against Petitioner as contrasted

with those litigants not subject to federal jurisdiction and has

unconstitutionally deprived Petitioner of a viable defense upon

which it would have prevailed in the state Courts.

Thus. for the reasons above stated and upon the authorities

cited, Petitioner respectfully prays that this Honorable Court

grant its writ of certiorari to the United States Court of Appeals

for the Seventh Circuit and that upon review the decision

rendered below be reversed with directions that judgment be

entered for Petitioner.

Respectfully submitted,

JoHN P. GORMAN,

JAMES T. FERRINI,

JosePH J. MCDONOUGH,

CLAUSEN, MILLER, GORMAN,

CAFFREY & WITOUS,

135 South LaSalle Street,

Chicago, Illinois 60603,

Attorneys for Defendant-Petitioner.

A ee

APPENDIX A.

IN THE

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

No. 76-1061

W. Woop PRINCE and JAmMes F. DONOVAN, as Trustees of the

CENTRAL MANUFACTURING DISTRICT,

Plaintiffs-A ppellants,

ROYAL INDEMNITY COMPANY,

Defendant-Appellee.

Appeal from the United States District Court

for the Northern District of Illinois,

Eastern Division—-No. 73 C 3195

WILLIAM J. Lyncu, Judge.

ARGUED JUNE 8, 1976—DECIDED SEPTEMBER 2, 1976

Before CUMMINGS, TONE and Woop, Circuit Judges.

Tone, Circuit Judge. This is a diversity action on a fire

insurance policy containing the usual provision that assignment

of the policy requires the insurer’s consent. The issue is whether

under Illinois law the insured had an insurable interest which

entitled him to recover for a fire loss after selling the insured

property, assigning the policy, and undertaking to forward the

assignment to the insurer for acceptance but failing to do so.

When the buildings covered by the policy burned and the

seller-insured filed a proof of claim, the insurer, not having

received the assignment or consented to it before the fire,

denied liability on the ground that the sale terminated the

seller’s insurable interest. The District Court sustained this

position. We reach the opposite result.

The case was submitted to the District Court for decision

on the following stipulated facts: Plaintiffs are the trustees of

Central Manufacturing District (CMD), which is engaged in

developing and managing industrial real estate. CMD is the

named insured under a fire insurance policy issued by defendant

Royal Indemnity Company which covered, among other build-

ings, a warehouse and garage leased by CMD to A & P Com-

pany. Royal had been the insurer of the A & P-leased property

since 1966. In 1972 CMD agreed to sell 69 parcels of real

estate, including the A & P-leased property, to the Prudential

Insurance Company of America. As a part of this transaction

it was agreed that CMD would continue to manage the prop-

erties transferred. Transfer of ownership was effected in four

separate closings. At the fourth closing, on January 4, 1973,

title to the A & P-leased property and 16 other parcels was

transferred.

Among the documents tendered by CMD to Prudential at

each closing were executed assignments of fire insurance policies

covering structures on the transferred parcels. At Prudential’s

request, CMD agreed to forward these assignments to the various

insurers to obtain their approvals of the assignments.

CMD neglected to deliver the assignment of the policy cover-

ing the A & P-leased property to defendant for acceptance.

On May 27, 1973, a fire destroyed the warehouse and damaged

the garage, causing a loss which it is agreed amounted to

$2,415,729. CMD filed a proof of loss. Defendant denied liabil-

ity on the ground that CMD’s insurable interest terminated when

the property was transferred to Prudential.

ee en ee Oe ee ee ee

Some six months after the fire, Prudential transferred the

A & P property back to CMD and CMD returned the purchase

price pursuant to an agreement which recited that it was made

“in lieu of determining the amount of damages for which the

Trustees are liable to Prudential on account of the fault or

neglect of the Trustees .. .”

Plaintiffs argue that CMD had an insurable interest in the

property by virtue of (1) CMDs liability to Prudential for

failure to procure defendant's consent to the assignments and

(2) the reconveyance by Prudential to CMD, which plaintiffs

argue was a rescission of the original sale of the parcels and

relates back to the time CMD transferred them to Prudential.’

In an unpublished memorandum, the District Court held that

basing an insurable interest upon CMD’s failure to perform

“would serve to deprive the insurance company of its right

to consent to any assignment as provided for expressly

in the insurance policy, and would serve to exculpate the

transferor from liability for its own misfeasance or breach

of contract with the transferee at the expense of the insur-

ance company.” .

The court also found the second argument “to be without merit,”

and entered judgment for the insurer. We reverse on the basis

of plaintiffs’ first argument.

We find no authority in Illinois law to support the District

Court’s view. The existence of an insurable interest in the named

insured does not depend upon whether the insurer could have

refused to consent to an assignment of the policy to another

insured, or whether the named insured breached an obligation

1. A third theory, that CMD’s contract with Prudential to

manage the properties gave CMD the requisite interest to insure

them, was raised for the first time on appeal and therefore comes

too late. We note in passing, however, that such a limited

interest would not support the damages which plaintiffs seek,

because recovery is limited to the extent of actual interest.

Chicago Title & Trust Co. v. United States F. & G. Co., 511

F. 2d 241, 247 (7th Cir. 1975); see 3 Couch on Insurance 2d

§ 24:2.

to a third party.” All that is necessary is an “ ‘interest in property

by the existence of which [the insured] receives a benefit, or by

the destruction of which he will suffer a loss’. . . . ‘That the

person may suffer loss is a sufficient foundation for his claim

to an insurable interest.’”” Home Insurance Co. v. Mendenhall,

164 Ill. 458, 464-465, 45 N. E. 1078, 1079-1080 (1897).* See

also Lieberman v. Hartford Fire Insurance Co., 6 Tl. App. 3d

948, 949, 287 N. E. 2d 38, 40 (1st Dist. 1972). The law else-

where is in accord. See 3 Couch on Insurance 2d § 24:13; Parks

v. Federal Crop Insurance Corp., 416 F. 2d 833, 839 (7th Cir.

1969). Neither legal title nor possession is required. Beddow v.

Hicks, 303 Ill. App. 247, 258, 25 N. E. 2d 93, 98 (3d Dist.

1940); Welch v. Northern Assurance Co., 223 Ill. App. 77, 83

(1st Dist. 1921). Thus Illinois courts have held that an insurable

interest exists in a variety of situations in which the insured

lacks either title or possession, or both. Griffin v. Pfeffer Lumber

Co., 285 Ill. 19 (1918) (lessee of real estate); Danvers Mutual

Fire Insurance Co. v. Schertz, 95 Ill. App. 656 (3d Dist. 1900)

(owner of equitable title); Whelan v. Massachusetts Bonding

& Insurance Co., 205 Ill. App. 122 (2d Dist. 1917) (mortgagor

and mortgagee of same property); Home Insurance Co. v. Peoria

& P. U. R. Co., 178 Ill. 64, 52 N. E. 862 (1899) (bailee);

Welch v. Northern Assurance Co., supra, 223 Ill. App. 77

(shareholders in a solvent company). The reason for the require-

2. As is customary, the policy does not specify the kind of

interest the insured must have in the insured property in order

to recover but leaves that to the law. The policy provides, inter

alia, that defendant insures CMD

“to the extent of the actual cash value of the property at the

time of the loss, but not exceeding the amount which it

would cost to repair or replace the property . . . against

all direct loss by fire . . . to the property described herein

while located or contained as described in this policy. . . .”

3. The first quotation within a quotation is from Justice

Gray’s opinion in Eastern R. Co. Vv. Relief Fire Ins. Co., 98

Mass. 420, 423 (1868). The second is from May on Insurance,

§ 80, at 87.

re ee Oe re eee

Chet ten mee. oes

ee neh ee At a EE ee ON

ment of an insurable interest is “to prevent the use of insurance

for illegitimate purposes. It should not be extended beyond the

reasons for it by excessively technical construction.” Womble

Vv. Dubuque Fire & Marine Insurance Co., 310 Mass. 142, 147,

37 N. E. 2d 263, 266 (1941), quoted with approval and fol-

lowed by this court in Lititz Mutual Insurance Co. v. Lengacher,

248 F. 2d 850, 853 (7th Cir. 1957).

Accordingly, if CMD might have suffered a loss by reason

of the destruction of the property, it had an insurable interest.

CMD argues that there was such a risk of loss arising from the

undertaking to forward the executed assignment of the in-

surance policy to the insurer and to obtain the latter’s consent.

That undertaking created a duty to forward the assignment and

seek the insurer’s consent and to notify Prudential if consent was

not obtained. Because of its breach of this duty, CMD argues,

it was liable to Prudential when the insured property burned,

and CMD therefore had an insurable interest.

The defendant insurer’s strongest response to CMD’s argu-

ment is based on several early cases, one decided by an Illinois

court, in which the liability of sellers for failure to effect trans-

fers of insurance on the property sold was limited to the value

of the policy before the fire.‘ This argument relates, of course,

to the amount of the insurable interest, not to its existence,

but we are in any event not persuaded that these cases should

control here. The Illinois case is easily distinguishable,’ and,

4. Davis v. Osborn, 159 Ill. App. 283 (3d. Dist. 1910);

Dodd v. Jones, 137 Mass. 322 (1884); Elfenbein v. Abbon-

danza, 64 Misc. 176, 118 N. Y. S. 1073 (1909); Williams v.

Meyers, 144 Okla. 24, 289 P. 294 (1930); United States Bond

& Mortgage Corp. v. Berry, 249 Ky. 610, 61 S. W. 2d 293

(1933).

5. Davis v. Osborn, supra, note 4, refused to impose liability

on the seller, who had merely agreed to assign the policies and

had assigned them. Instead of immediately sending the assigned

policies to the insurer for approval of the assignments, the seller,

with the buyer’s knowledge, had placed them in a safe over the

(Continued on next page)

whether or not the others represent the present law elsewhere,

they are not in our opinion consistent with the principles ap-

plied in analogous Illinois cases in recent years.

The liability of CMD to Prudential is analogous to the

liability of an insurance broker to a customer for negligent

failure to perform an agreement to procure insurance. Roberson

Vv. Knupp Insurance Agency, 125 Ill. App. 2d 373, 377, 260

N. E. 2d 849, 851 (Sth Dist. 1970); Johnson v. Illini Mutual

Insurance Co., 18 Ill. App. 2d 211, 216, 151 N. E. 2d 634,

637 (3d Dist. 1958). Whether the action against the broker

sounds in tort based on negligence, as contended by defend-

ant and as suggested by Talbot v. Country Life Insurance Co.,

8 Ill. App. 3d 1062, 1065, 291 N. E. 2d 830, 832 (3d Dist.

1973), or in contract for failure to perform the agreement to

procure, as Foley v. Wolfie, Steffelin & Co., 232 Ill. App. 333,

339 (1st Dist. 1924), would indicate, makes little difference.

In either case, Illinois courts have consistently held that the

broker’s liability covers the full extent of the loss, up to the

limits of the policy the broker agreed to procure. Gothberg v.

Nemerovski, 58 Ill. App. 2d 372, 383, 208 N. E. 2d 12, 19

(Ist Dist. 1965); Welch v. Northern Assurance Co., supra,

223 Ill. App. at 81. The liability is based, not upon the agency-

principal relationship of a broker and client, but upon the

broker’s failure to perform an obligation. See Evan L. Reed

(Continued from preceding page)

holiday on‘which the fire occurred. After holding that the buyer

had no cause of action in trespass on the case against the seller

under these circumstances, the court then went on in dictum to

say,

“The only damage that [the buyer] could possibly have

recovered against [the seller] would have been the amount

that [the buyer] would have been required to pay in secur-

ing policies of like amount upon the stock of merchandise

and there is no proof as to any such damage in the record.”

159 Ill. App. at 286.

This statement must be read with the court’s view of what the

seller’s obligation was, viz., merely to assign the policies.

Manufacturing Co. v. Wurts, 187 Ill. App. 378, 386 (1st Dist.

1914). Because the broker in such a case would be liable to

the purchaser for the loss if the property were destroyed, he

has an insurable interest in it. See 3 Couch on Insurance 2d

§ 24:13.

Like a broker asked to obtain renewal of a policy, CMD

did not agree to insure the property but did agree to seek con-

tinuation of the insurance. And, like such a broker, CMD under-

took responsibility for obtaining the insurer's agreement to con-

tinue to insure the risk. We perceive no reason why the liability

of CMD to Prudential should not be the same as that of the

broker to his customer, and we believe an Illinois court would

hold that it is the same. If we are right, it follows that CMD has

an insurable interest to the extent of that liability.

Whether the defendant insurer would have consented to the

assignment is immaterial, just as, in the case of the broker who

has agreed to seek renewal of a policy, it is immaterial whether

the insurer would renew the policy. Inherent in the obligation

to seek continuation of an insurance policy is the duty to notify

the applicant if the insurer declines to continue the risk, so the

applicant “may not be lulled into a feeling of security or put

to prejudicial delay in seeking protection elsewhere.” Talbot v.

Country Life Insurance Co., supra, 8 Ill. App. 3d at 1065,

291 N. E. 2d at 832. If the insurer would not have consented

to the assignment of the policy, CMD would have learned of

that fact upon requesting consent. It could then have notified

Prudential accordingly so the latter could obtain coverage else-

where. CMD’s inaction thus caused damage to Prudential

whether or not the defendant insurer would have consented to

the assignment. This case can be decided therefore without de-

ciding whether consent would have been withheld.°

6. Nothing in the record suggests any reason why the defend-

ant would not have give its consent. The contention made at

oral argument that consent might have been withheld was based

on matters outside the record. It appears from the record that

defendant did consent to the assignments of policies covering

certain other property involved in the sale.

Nor is CMD’s right to recover under the policy impaired by

the possible existence of a defense against Prudential based on

the latter’s failure to make inquiry concerning the delay in de-

livery of the consent. An insured’s exposure to loss need not

be certain or reduced to judgment to give him an insurable in-

terest. When he in good faith settles a claim covered by insurance,

the amount paid in settlement is recoverable from the insurer.

Kinnan v. Charles B. Hurst Co., 317 Ill. 251, 256-260, 148

N. E. 12, 14-16 (1925); Loeber Motors, Inc. v. Sims, 34 Il.

App. 3d 342, 348-349, 340 N. E. 2d 132, 136-137 (1st Dist.

1975); Crest v. State Farm Mutual Automobile Insurance Co.,

20 Ill. App. 3d 382, 387, 313 N. E. 2d 679, 683 (2d Dist.

1974). The net cost to CMD of the settlement with Prudential

is the amount of CMD’s loss caused by fire.

We reject defendant’s argument that CMD’s loss is an “in-

direct” ,oss and therefore not covered by the policy. The policy

requires a “direct loss by fire . . . to the property.” (See note 2,

supra.) The words “direct loss” do not refer to the reason the

fire caused loss to CMD but to the relationship between the fire

and the damage or destruction to property. As we said above,

the policy does not limit the kind of insurable interest the insured

must have in order to recover.

The judgment of the District Court is therefore reversed and

the case is remanded for further proceedings consistent with

this opinion.

REVERSED AND REMANDED.

A true Copy:

Teste:

Appeals for the Seventh Circuit

APPENDIX B.

W. Woop PRINCE and JAMEs F. DONOVAN, as Trustees of the

Central Manufacturing District,

Plaintiffs,

Vv.

ROYAL INDEMNITY COMPANY,

Defendant.

No. 73 C 3195.

United States District Court,

N. D. Illinois, E. D.

Dec. 2, 1975.

Action was brought by named insured against fire insurer to

recover on fire policy. The District Court, Lynch, J., held that

where named insured transferred by deed pursuant to real estate

agreement its right, title and interest in insured property to pur-

chaser, and immediately thereafter undertook to procure consent

from fire insurer to assignment of its rights under fire policy,

which expressly stated that assignment would not be valid without

insurer’s written consent, to purchaser but failed to obtain such

assignment, named insured lost any insurable interest in property

as of time of delivery of deed.

Judgment for insurer.

1. Insurance 123

Where named insured transferred by deed pursuant to real

estate agreement its rights, title and interest in insured property

to purchaser, and immediately thereafter undertook to procure

Al0

consent from fire insurer to assignment of its rights under fire

policy, which expressly stated that assignment would not be

valid without insurer’s written consent, to purchaser but failed

to obtain such assignment, named insured lost any insurable

interest in property as of time of delivery of deed.

2. Insurance 115(6)

In light of express provision for written consent of fire insurer

to any assignment of rights under policy and insured’s total

failure to seek insurer’s consent to assignment of policy benefits

to purchaser following transfer of property by deed to purchaser,

supposed liability of named insured to purchaser for fire damage

to property was not tantamount to creation of insurable interest

in named insured.

3. Insurance 115(1)

Insurable interest must exist in property which is sought to

be insured against loss by fire, or arise from some direct relation-

ship to property sought to be insured; such interest cannot arise

from facts wholly extraneous to and separate from destroyed

property.

Gerald E. Grashorn and Stephen C/Sruner, of Winston &

Strawn, Chicago, Ill., for plaintiffs.

John P. Gorman, of Clause

Witous, Chicago, Ill., for defg

Miller, Gorman, Caffrey &

MEM NDUM OF DECISION

LyNcH, District Judge.

This is an action brought by the plaintiff to recover on a fire

insurance policy issued by defendant. Jurisdiction in this Court

is based on diversity, 28 U. S. C. Section 1332. The parties

All

have submitted a stipulation of facts and having waived a trial

of the issues, seek this Court’s decision based on the stipulation

of facts as to which party is entitled to judgment. A summary

of the parties’ stipulation of facts follows:

Plaintiffs W. Wood Prince and James F. Donovan are and

have been trustees of the Central Manufacturing District since

before 1950. The Central Manufacturing District (hereinafter

referred to as CMD) has been and presently is engaged in the

business of purchasing and developing industrial real estate.

Having developed real estate for industrial purposes, CMD

would either sell that property to a purchaser, or lease’ the prop-

erty to a tenant and manage it for the period of tenancy, re-

ceiving income for its managing services for the benefit of

CMD’s shareholders.

In 1958, a subsidiary of CMD acquired title to certain real

estate located in an area of Chicago, Illinois, known as the

“Crawford Industrial Development.” This real estate was trans-

ferred to the trustees in 1965. Included in this real estate were

two parcels which, at a later date, the trustees improved by the

erection of a A & P grocery warehouse on one lot and a A & P

grocery garage on a second lot. At all times relevant hereto,

A & P leased these two pieces of property for the purposes of

maintaining a warehouse to store canned food stuff and a garage

to store and repair automobiles and trucks owned and operated

by A & P.

In June or July of 1971, a representative of Goldman, Sachs

inquired as to whether CMD would be interested in selling a

large number of its real estate holdings to an insurance com-

pany on a cash basis. Eventually, Goldman, Sachs produced

the Prudential Insurance Company of America (hereinafter re-

ferred to as Prudential) as a prospective purchaser of some of

CMD’s property. After lengthy negotiations, CMD and Pruden-

tial entered into an agreement dated November 22, 1972, by

which Prudential agreed to purchase 69 separate and distinct

parcels of CMD real estate. Of these 69 parcels, 64 were oc-

Al2

cupied by tenants pursuant to leases with CMD, and 5 parcels

were vacant buildings. Included in the 69 parcels were the two

parcels leased to A & P for the warehouse and garage. As to

these two parcels, CMD had arranged for the purchase of

fire insurance policies and paid the premium long prior to the

November 22, 1972 agreement.

On November 22, 1972, a meeting (the first closing) was held

between representatives of CMD and Prudential for the purpose

of transferring title to 33 of the 69 parcels of real estate. At that

meeting CMD’s representatives produced and delivered a “Seller’s

Deed” which conveyed the 33 parcels to Prudential. Together

with that deed, CMD delivered letters of opinion concerned with

the condition of title of the parcels, leases, executed assignments

of leases, various types of notices to each tenant occupying the

premises, evidences of existence of fire insurance and executed

assignments to Prudential of the interest of CMD in the fire

insurance policies. Having examined these documents, the

representative of Prudential pushed the evidences of fire in-

surance and the executed assignments of the policies to Pruden-

tial across the conference table to representatives of CMD, with

the request for them to take care of delivering the assignments

of the insurance policies to the proper insurance carriers for

approval and acceptance. After receiving Prudential’s check

for the purchase price of these 33 parcels, the representatives

of CMD agreed to comply with Prudential’s request for them to

take care of delivering the assignments of the insurance policies

to the carriers for their consent.

The evidence of fire insurance and the executed assignments

thereof were carried by representatives of CMD to CMD’s

office and were delivered to CMD’s insurance manager with

instructions to deliver the assignments to the proper insurance

companies or their agents and arrange to have the various in-

surance companies accept the assignments. Pursuant to these

instructions CMD’s insurance manager forwarded these assign-

ments to the various insurance companies.

ee)

~ ee eee ee

ene ae Lee ee en

ee net tus Me ae a ne

oD te eat oe ee =

Al3

On December 15, 1972, a meeting (the second closing)

was held between the same parties for the purpose of transferring

title to 17 of the 69 parcels from CMD to Prudential. At this

meeting, business was transacted in substantially the same man-

ner as in the November 22, 1972 meeting. After the meeting

adjourned representatives of CMD delivered the evidences of fire

insurance and executed assignments thereof to CMD’s insurance

manager with instructions to deliver the assignments to the

proper insurance companies or their agents and arrange to have

the various insurance companies accept the assignments. How-

ever, CMD’s insurance manager forwarded and received ac-

ceptance of only 3 of the 17 assignments, contrary to the

instructions given to him.

On December 19, 1972, a third closing meeting was held for

the purpose of transferring title to 1 of the 69 parcels from CMD

to Prudential. Again business was transacted in a manner sub-

stantially similar to that in the prior two closings, and again

CMD’s insurance manager failed to follow instructions and for-

ward the executed assignment wherein CMD assigned its interest

in the insurance policy to Prudential to the proper insurance

company for acceptance of the assignment.

On January 4, 1973, a fourth closing meeting was held for

the purpose of transferring title to the last 18 of the 69 parcels

of real estate from CMD to Prudential. Among the 18 parcels

were the grocery warehouse and grocery garage leased to A & P.

The transactions at the meeting took virtually the same form as

the previous transactions. Again CMD’s insurance manager, con-

trary to instructions, failed to forward to the proper insurance

companies for acceptance the executed assignments of CMD’s

interest in the fire insurance policies to Prudential.

The two parcels of real estate on which were located the

A & P grocery warehouse and garage were insured by CMD

through defendant Royal Indemnity Company. The lease between

CMD and A & P did not require the tenant to furnish and pay

the fire insurance for the protection of the owner, CMD. Con-

Ai4

sequently CMD itself purchased the fire insurance policies and

paid the premiums thereon. At the fourth closing representatives

of CMD produced an assignment executed by the trustees of

CMD of the insurance policy covering the two parcels leased to

A & P. The grocery warehouse scheduled in the policy was in-

sured against fire damage in the amount of $2,400,000, and the

grocery garage, also scheduled in the same policy, was insured

for $240,000. As mentioned previously, the assignment of

CMDs interest in this policy to Prudential was never delivered

to defendant Royal Indemnity for its acceptance. Royal In-

demnity has never consented to the assignment.

On May 27, 1973, a fire occurred in the Crawford Industrial

Development. Among the buildings destroyed or damaged were

the two buildings insured under the Royal Indemnity Policy.

The A & P grocery warehouse was completely destroyed, with a

loss at least equal to the insurance in the sum of $2,400,000.

The A & P grocery garage was damaged by the fire in the

amount of $15,720. CMD notified Royal Indemnity’s agents

of the damage on May 27, 1973. After investigation by Royal

Indemnity and its attorneys, CMD received a letter dated June

29, 1973, from Royal Indemnity in which the insurance com-

pany denied any liability for the loss due to the fire, giving as

its reason that CMD’s insurable interest terminated on January

4, 1973. Royal Indemnity also enclosed a check representing

the return premium applicable to the two damaged or destroyed

buildings. CMD returned this check and pressed its claim for

the damaged property.

Counsel have stipulated, in substance, to the above outlined

set of facts. The following facts are also stipulated to by counsel.

However, defendant Royal Indemnity contends that they are

irrelevant and immaterial.

At the first closing (November 22, 1972), one of the prop-

erties conveyed to Prudential was occupied by Vin-Tex Sealers,

Inc., pursuant to a lease which required Vin-Tex Sealers to

purchase fire insurance and pay the premium therefor, naming

As a a

Aeteeeem ott! amen es.

Al5

CMD as an insured. Vin-Tex purchased insurance from Royal

Indemnity. Among the documents produced by CMD at the

closing were a memorandum of this insurance and an executed

assignment of CMD’s interest therein. CMD’s insurance man-

ager, pursuant to direction, sought Royal Indemnity’s accept-

ance of this assignment, which was received.

It wasn’t until three days after the fire that CMD discovered

that some or all of the assignments of fire insurance policies

covering parcels transferred to Prudential at the last three clos-

ing dates were not forwarded to the respective insurance com-

panies for their acceptance, but were still in CMD’s possession.

Having discovered this failure, CMD immediately sought ac-

ceptances of these assignments which were received from various

insurance companies with the exception of Royal Indemnity,

which refused to accept assignments of insurance policies cover-

ing the A & P properties, as well as property occupied by A-1

Tire Company under a lease from CMD. Through its agent,

Corroon & Black, Royal Indemnity refused to accept the assign-

ment of the A-1 insurance policy. Corroon & Black, as brokers,

arranged for interim insurance on the A-1 property through a

binder with another insurance company.

The stipulation also contains a photocopied page of a pamphlet

used in training cf employees of Royal Indemnity. The page

deals with an explanation of insurable interest.

The stipulation further indicates that on June 5, 1973, rep-

resentatives of CMD and Prudential met, at which time Pruden-

tial was advised that at the time of the fire CMD had not de-

livered the assignments of fire insurance on the A & P ware-

house and grocery garage to Royal Indemnity, and that Royal

Indemnity had not consented to the assignments before the fire.

Prudential was further advised that Royal Indemnity denied any

liability under the insurance policies for the reasons that Pru-

dential was not a named insured and that CMD had no insur-

able interest. CMD and Prudential, after individual investiga-

tions by counsel as to CMD’s liability to Prudential, then entered

Al6

into an agreement whereby CMD returned the purchase price to

Prudential for the two A & P properties, and Prudential deeded

the properties back to CMD.

The complaint seeks a judgment under the policy for

$2,415,729.00, plus interests, costs, and attorney’s fees. That

figure represents $2,400,000 for the total loss of the A & P

grocery warehouse, and $15,729.00 for damages to the A & P

grocery garage.

The issue that must be decided by this Court may be stated

as follows: Whether CMD, having previously transferred title

on January 4, 1973, to Prudential, and having failed to procure

an acceptance of the assignment of rights under the fire insurance

policy from CMD to Prudential, had an insurable interest in

the two A & P properties at the time of the fire on May 27,

1973, such that it may recover under the terms of the fire in-

surance policy. Inasmuch as the property insured is located in

Illinois, and it appears that the contract of insurance was entered

into in Illinois, Illinois law will govern the determination of this

issue.

Plaintiff contends that when the representatives of CMD

agreed to procure acceptances of assignments of CMD’s interest

in the fire insurance policy to Prudential, CMD became liable

to Prudential for the value of that policy for which CMD failed

to seek an acceptance of the assignment. It is plaintiff's conten-

tion that when the fire destroyed the A & P grocery warehouse

and damaged the A & P grocery garage, CMD became liable for

those lo:ses to Prudential because CMD falied to perform its

part of the oral contract with Prudential to acquire Royal In-

demnity’s consent to the assignment. By virtue of this putative

liability, plaintiff claims to fail within the ambit of the definition

of insurable interest.

For many years the law in Illinois has been settled that a

party has an insurable interest in property from the existence

of which he receives a benefit or from the destruction of which

he will suffer a pecuniary loss, although he has no title to or

Al7

possession of the premises. Home Ins. Co. v. Mendenhall, 164

Ill. 458, 45 N. E. 1078; Beddow v. Hicks, 303 Ill. App. 247,

25 N. E. 2d 93.

Plaintiff's brief cites numerous cases standing for the proposi-

tion that where a vendor agrees to procure insurance for the

property of the vendor and fails to do so, the vendor has an in-

surable interest in that property. Those cases are distinguishable

from the present at least to the extent that in the present case

the fire insurance was already procured, and the vendor failed

to perform its promise to seek the consent to the assignment of

a third party wholly distinct from the parties to the transaction.

While it is true that an insurable interest is predicated upon

the economic benefit of the continuing existence of the property

in question, or the economic loss due to the destruction of the

property, that statement of the law, standing by itself, is in-

applicable in light of the additional facts presented in this case

as well as other rules of law relating to an insurance carrier’s

right to consent to assignments of its policies.

On the face of the policy issued by Royal Indemnity to CMD

covering the warehouse and garage is the legend: “Assignment

of this policy shall not be valid except with the written consent of

this Company.” Courts have uniformly upheld such express pro-

visions in a fire insurance policy. See Pfeffer v. Farmers State

Bank of Schaumberg, 263 Ill. App. 360; Klefstad v. Anderson

Centry Ins. Co., 207 F. 2d 288 (7th Cir. 1953). In the part of

the stipulation contended by defendant to be irrelevant and im-

material, plaintiff offers evidence that after the first closing

Royal Indemnity issued an acceptance of an assignment of a fire

insurance policy covering the Vin-Tex property, and further

that other insurance companies routinely accepted assignments

of policies after CMD discovered its insurance manager had

failed to forward those assignments for acceptance. Apparently,

plaintiff seeks to establish an inference that Royal Indemnity

would have routinely accepted an assignment from CMD to

Prudential, had those assignments been promptly forwarded for

Al8

acceptance, and that the only reason Royal Indemnity refused to

consent to the assignment was that the subject matter of the

policy was destroyed. The Court finds that evidence of what

the defendant would or would not have done is irrelevant, in

light of the simple fact that the defendant never consented to the

assignment either prior to or after the fire of May 27, 1973.

[1] In light of the facts stipulated to and the applicable law,

this Court holds that where 2 named insured, under the terms

and conditions of a fire insurance policy, transfers by deed

pursuant to a real estate agreement all of its right, title and

interest in the property covered by the insurance policy to a

transferee, and immediately thereafter undertakes to procure

a consent from the insurer to an assignment of its rights under

the policy to the transferee, and then fails to perform that under-

taking, the named insured will be deemed to have lost any in-

surable interest in the property covered by the insurance policy

as of the time of delivery of the deed. A rule of law, such as

that proposed by the plaintiff which would create an insurable

interest in the transferor by virtue of his liability to the transferee

for failure to perform his undertaking to procure an insurance

company’s consent to an assignment would serve to deny the

insurance company of its right to consent to any assignment as

provided for expressly in the insurance policy, and would serve

to exculpate the transferor from liability for its own misfeasance,

or breach of contract with the transferee at the expense of the in-

surance company.

{2, 3] In light of the express provision for the written con-

sent of the insurance company to any assignment of rights under

a policy, and in light of the insured’s total failure to perform its

promise to seek the insurance company’s consent to the assign-

ment, the supposed liability of CMD to Prudential is not tanta-

mount to the creation of an insurable interest in CMD. An in-

surable interest must exist in the property itself, or arise from

some direct relationship to the property sought to be insured. The

interest cannot arise from facts wholly extraneous to and separate

ee ee er

8 nl OT ont wh Ok eS Oh Petes

Al9

from the destroyed property—an insurable interest in CMD in

the destroyed property cannot arise by virtue of CMD’s own

misfeasance in performing its undertaking to procure Royal

Indemnity’s consent to the assignment of CMD’s rights under

the policy to Prudential.

For the above reasons, the Court holds that CMD’s insurable

interest in the A & P grocery warehouse and A & P grocery

garage terminated on January 4, 1973, the date on which CMD

transferred by deed the property to Prudential. This interest

terminated not because title was transferred, but rather because

CMD failed to perform its promise to obtain Royal Indemnity’s

consent to the assignment, and CMD cannot now, after the

property has been destroyed, exculpate itself from liability for

its own misfeasance at the expense of Royal Indemnity. Having

so held, this Court finds plaintiff's argument that a recission be-

tween CMD and Prudential served to reinstate an insurable

interest in CMD with respect to the destroyed property to be

without merit.

Accordingly, for the above mentioned reasons, the Court finds

for the defendant on the stipulation of facts, and judgment is

hereby entered in favor of defendant Royal Indemnity Com-

pany.

/s/ WILLIAM J. LYNCH,

Judge, United States

District Court.

Dated: December 2, 1975.

A20

APPENDIX C.

IN THE UNITED STATES DISTRICT COURT

For the Northern District of Illinois

Eastern Division

W. Woop PrINcE and JAMES F. }

DoNOVAN, as Trustees of the Central |

Manufacturing District,

Plaintiffs,

> No. 73 C 3195

vs.

ROYAL INDEMNITY COMPANY,

Defendant. :

STIPULATION OF FACTS.

The plaintiffs (hereinafter referred to as “CMD”) and the

defendant (hereinafter referred to as “ROY AL”), by their respec-

tive attorneys, hereby stipulate that the following facts are

relevant and material and are true and correct:

1. That the plaintiffs are citizens of the State of Illinois and

the principal place of business of CMD is in the State of Illinois.

2. That the defendant is a corporation, organized and exist-

ing under the laws of the State of New York, and the principal

place of business of said defendant is in the State of New York.

3. That the defendant is licensed to sell insurance within the

State of Illinois and maintains an office and does business in

Chicago, Illinois.

4. That the amount in controversy, exclusive of interest and

costs, is in excess of $10,000, and the United States District

Court for the Northern District of Illinois, Eastern Division, has

jurisdiction of the parties and the matter in controversy.

2 me ls 6 Nee OR a dee

oe ears —— vo =

ee ee ee a See

ses

PA ens esata ene I NS

A21

5. That the plaintiffs, W. Wood Prince and James F. Donovan,

are Trustees of CMD and have been the Trustees operating said

company since prior to 1950.

6. That at all times material to this litigation each of the

named Trustees had authority to act with or without a meeting

and the act of either of the Trustees was valid and binding and

considered to be the action of the Trustees, and that all docu-

ments executed by either of the Trustees were valid and as

effectual and binding as if executed by both of the Trustees.

7. That for many years prior to 1950, and up to the present

time, CMD’s principal business has been and is the purchase and

development of industrial real estate, and either selling said

improved property to a purchaser or leasing said property to a

tenant and managing the same during the period of tenancy,

receiving the income therefrom for the benefit of the shareholders

of CMD.

8. In 1958, the then Trustees, through a subsidiary, acquired

title to certain real estate located in Cook County, in an area of

Chicago known as the “Crawford Industrial Development,”

which real estate was transferred to the Trustees during 1965.

Included in said real estate were two parcels which, at a later

date, were improved by the Trustees by the erection of an A&P

grocery warehouse on one lot and an A&P grocery garage on the

second lot, designated as parcels No. L29 and L30, respectively,

both of which properties were leased to the A&P by the Trustees

of CMD, and were still so leased by Prudential (purchaser from

CMD) on May 27, 1973, on which date a fire occurred destroy-

ing or damaging several buildings in the Crawford Industrial

Development, including the said A&P grocery warehouse and the

A&P grocery garage. At all times during the duration of the

lease (1966 to the date of the fire May 27, 1973), the warehouse

was used by the A&P to store canned food stuff and the garage

was used to store and repair automobiles and trucks owned and

operated by the A&P and from the time the A&P leased said

properties until January 4, 1973 when said properties were sold

A22

to Prudential, the CMD managed the properties for the benefit of

the shareholders of CMD and after January 4, 1973 CMD

managed said properties for the benefit of Prudential. No change

of any character was made after the sale of the properties on

January 4, 1973 with respect to the use of the buildings by A&P

or with respect to the management of the buildings by CMD.

In addition to the “Crawford Industrial Development,” the

CMD owns and has developed and manages industrial districts in

other parts of Illinois, one of which is located in Kane County

and known as the “St. Charles Industrial Development,” another

being located in Du Page County and known as the “Itasca

Industrial Development,” and including properties in other States

of the Union, one of which is Texas.

9. That in June or July 1971 a representative of Goldman,

Sachs contacted Mr. James F. Donovan, one of the Trustees of

CMD, and made inquiry as to whether CMD would be interested

in selling a large number of its real estate holdings to an imsur-

ance company on a cash basis. Donovan advised Goldman,

Sachs that while there was no strong desire to dispose of any

CMD properties, they would be interested in a sale based upon

valuations acceptable to CMD. Goldman, Sachs eventually pro-

duced The Prudential Insurance Company of America (herein-

after referred to as “Prudential”) as a prospective purchaser of

CMD properties and during the first ten months of 1972 the

representatives of Prudential and of CMD carried on negotiations

for the purchase and sale of CMD properties which culminated

in an agreement dated November 22, 1972, by which agreement

Prudential agreed to purchase 69 separate and distinct parcels of

CMD real estate and CMD agreed to sell said parcels to Pruden-

tial (a copy of said Agreement and the exhibits attached thereto

is attached hereto as Exhibit 1).

10. That of the 69 parcels of real estate being purchased by

Prudential 5 parcels were vacant buildings and 64 were ocgupied

by tenants pursuant to leases.

ae tn Ses WN

A23

11. That for some years prior to November 22, 1972 CMD

had arranged for the purchase of fire insurance policies and paid

the premiums on the vacant buildings owned by it and on other

buildings used by CMD in the operation of its business (includ-

ing 5 parcels of real estate leased to the A&P). All other tenants

occupying premises being sold to Prudential were occupied pur-

suant to leases which required the tenant to purchase fire insur-

ance, pay the required premiums, and furnish CMD with evidence

that insurance coverage was in existence which adequately pro-

tected the interest of CMD as the owner of the property.

12. On November 22, 1972 a meeting (the first closing) was

held in the Office of Winston & Strawn for the purpose of trans-

ferring title to 33 of the 69 parcels of real estate being purchased

by Prudential from CMD. Messrs. Donovan, Long, Berg,

Rumbaugh and Rearick were present representing CMD, and

Messrs. Hitt and Rebholz were present representing Prudential

That at said meeting the CMD representatives produced and

delivered to the Prudential representatives “Seller’s Deeds” trans-

ferring and conveying 33 parcels of real estate located in either

the St. Charles or the Itasca Industriai Development in either

Kane or Du Page County, Illinois, certain letters of opinion from

the Chicago Title Insurance Company concerned with the condi-

tion of the title to said parcels of real estate, leases, executed

assignments of leases, various types of notices to each tenant

Occupying said premises, evidences of the existence of fire insur-

ance, and executed assignments to Prudential of the interest of

CMD in said insurance policies.

That all of the documents were examined, and checked against

a checklist, and approved by Mr. Hitt, the attorney representing

Prudential, in the presence of Mr. Rebholz and the representa-

tives of CMD. That after so examining the documents he (Hitt)

pushed the evidences of fire insurance and the executed assign-

ments wherein CMD assigned its interest in said policies to

Prudential across the conference table to Messrs. Rumbaugh and

Berg with the request for them to take care of delivering the

A24

assignments of the insurance policies to the proper insurance

carriers for approval and acceptance. Mr. Hitt then delivered to

Mr. Donovan a check issued by Prudential covering the purchase

price of the 33 parcels; Messrs. Rumbaugh and Berg accepted

redelivery of the evidences of fire insurance and the executed

assignments of said policies and agreed to comply with Mr. Hitt’s

request. The meeting adjourned.

The evidences of fire insurance and the executed assignments

thereof wre carried by either Mr. Berg or Mr. Rumbaugh from

the meeting room to the Office of CMD. The evidences of fire

insurance and the executed assignments thereof were delivered to

the CMD insurance Manager, John S. Sproul, with instructions

to deliver the assignments to the proper insurance companies or

their agents and arrange to have the various insurance companies

accept the assignments. Pursuant to said instructions the said

Sproul did forward the various assignments to the designated

insurance companies.

13. On December 15, 1972 a meeting (the second closing)

has held in the Office of Winston & Strawn for the purpose of

transferring title to 17 of the 69 parcels of real estate being

purchased by Prudential from CMD. Messrs. Berg, Rumbaugh

and Rearick were present representing CMD, and Mr. Hitt was

present representing Prudential. That at said meeting the CMD

representatives produced and delivered to the Prudential repre-

sentative “Seller's Deed” transferring and conveying 17 parcels

of real estate, one parcel being located at Sist and Hamlin

Streets in Chicago, Illinois, and the balance of said parcels

being located in either the “Morgan Industrial Development”

or in the “Original East District” in Cook County, Illinois,

certain letters of opinion from the Chicago Title Insurance

Company concerned with the condition of the title to said

parcels of real estate, leases, executed assignments of leases,

various types of notices to each tenant occupying said premises,

evidences of the existence of fire insurance, and executed assign-

ments to Prudential of the interest of CMD in said insurance

policies.

~~ A I Se Nt

A25

That all of the documents were examined and checked

against a checklist, and approved by Mr. Hitt, the attorney

representing Prudential, in the presence of the representatives of

CMD. That after so examining the documents he (Hitt) pushed

the evidences of fire insurance and the executed assignments

wherein CMD assigned its interest in said policies to Prudential

across the conference table to Messrs. Rumbaugh and Berg with

the request for them to take care of the details of delivering the

assignments oi the insurance policies to the proper insurance

carriers for approval and acceptance. Mr. Hitt then delivered

a check issued by Prudential covering the purchase of the 17

parcels; Messrs. Rumbaugh and Berg accepted redelivery of the

evidences of fire insurance and the executed assignments of

said policies and agreed to comply with Mr. Hitt’s request.

The meeting adjourned.

The evidences of fire insurance, the executed assignments

thereof, notices to tenants, leases and assignments of leases were

carried by either Mr. Berg or Mr. Rumbaugh from the meeting

room to the Office of CMD. The evidences of fire insurance

and the executed assignments thereof were delivered to the

CMD Insurance Manager, John S. Sproul, with the same

instructions to deliver the assignments to the proper insurance

companies or their agents and arrange to have the various

insurance companies accept the assignments. The said Sproul

forwarded and received acceptance of only 3 of the assignments

and, contrary to the instructions given to him after the second

closing, and without knowledge of any personnel connected

with CMD or Prudential, the balance of the assignments (14 in

number) were still undelivered and unaccepted by the insurance

companies as of May 31, 1973, after the fire occurred. However,

none of the 17 parcels sold in the “second closing” were damaged

or destroyed in the fire and therefore no claims arose on said

policies. On or about May 30, 1973, CMD personnel discovered

that Sproul had failed to carry out the instructions given to him

after the second closing (12-15-72).

A26

14. On December 19, 1972 a meeting (the third closing)

was held in the Office of Winston & Strawn for the purpose of

transferring title to 1 of the 69 parcels of real estate being

purchased by Prudential from CMD. Messrs. Bremer, Berg and

Rearick were present representing CMD, and Mr. Hitt was

present representing Prudential. That at said meeting the CMD

representatives produced and delivered to the Prudential repre-

sentative a “Seller's Deed” transferring and conveying 1 parcel of

real estate located in Dallas, Texas, letters of opinions from a

Title Company concerned with the condition of the title to said

parcel of real estate, lease, executed assignment of lease, various

types of notices to the tenant occupying said premises, evidence

of the existence of fire insurance, and executed assignment to

Prudential of the interest of CMD in said insurance policy.

That all of the documents were examined, and checked

against a checklist, and approved by Mr. Hitt, the attorney

representing Prudential, in the presence of the representatives

of CMD. That after so examining tc documents lie (Hitt)

pushed the evidence of fire insurance and the executed assign-

ment wherein CMD assigned its interest in said policy to

Prudential across the conference table to Messrs. Bremer and

Berg with the request for them to take care of delivering the

assignment of the insurance policy to the proper insurance

carrier for approval and acceptance. Mr. Hitt then delivered a

check issued by Prudential covering the purchase price of the

1 parcel; Messrs. Bremer and Berg accepted redelivery of the

evidence of fire insurance and the executed assignment of said

policy and agreed to comply with Mr. Hitt’s request.

The meeting adjourned.

The evidence of fire insurance and the executed assignment

thereof were carried by either Mr. Berg or Mr. Bremer from

the meeting room to the Office of CMD. The evidence of fire

insurance and the executed assignment thereof were delivered

to the CMD Insurance Manager, John S. Sproul, with the same

instructions to deliver the assignment to the proper insurance

ietemiearnte teeta oe

A27

company or its agent and arrange to have said insurance

company accept the assignment and to furnish to CMD a notice

of the acceptance. Contrary to said instructions and without the

knowledge of any personnel connected with CMD or Prudential,

the said Sproul did not forward the assignment to the designated

insurance company, and said assignment was still undelivered

and unaccepted by the said insurance company on May 31, 1973,

after the fire occurred. However, said parcel of real estate sold

in the “third closing” had not been damaged or destroyed and

therefore no claim arose on said policy. On or about May

30, 1973, CMD personnel discovered that Sproul had failed to

carry Out the instructions given to him after the third closing

(12-19-72).

15. On January 4, 1973 a meeting (the fourth closing) was

held in the Office of Winston & Strawn for the purpose of

transferring title to the last 18 parcels of the 69 parcels of real

estate being purchased by Prudential from CMD. That among

the 18 parcels included in this closing were:

(a) the A&P grocery warehouse located at 4404 West

District Boulevard and the A&P grocery garage located at

4330 West 41st Street, both in the Crawford Industrial

Development; these properties were occupied by the A&P

pursuant to leases with the CMD. Neither of these leases con-

tained a provision requiring the tenant (A&P) to furnish or pay

for fire insurance on said property to protect the interest of

the owner (CMD). CMD had insured these properties through

the Royal Indemnity Company in successive policies since the

completion of said buildings in 1966 and said properties were

included in a policy of insurance No. RKF 63-53-78 issued

by the Royal Indemnity Company identified therein as Item

No. 3 and Item No. 5, respectively, which policy also covered

various additional buildings located in its Chicago industrial

developments as therein identified; said insurance having been

directly bought by the CMD and the premiums due paid

directly by the CMD (a copy of said policy being attached

hereto as Exhibit 2).

A28

Messers. Berg, Rumbaugh and Rearick were present repre-

senting CMD, and Mr. Hitt was present representing Prudential.

That at said meeting the CMD representatives produced and

delivered to the Prudential representatives a “Seller's Deed”

transferring and conveying 18 parcels of real estate located in

either the Crawford Industrial Development or the Kedzie

Industrial Development in Cook County, Illinois, certain letters

of opinion from the Chicago Title Insurance Company con-

cerned with the condition of the title to said parcels of real

estate, leases, executed assignments of leases, various types of

notices to each tenant occupying said premises, evidences of the

existence of fire insurance, and executed assignments to

Prudential of the interest of CMD in said insurance policies.

Among the evidences of insurance presented to the Prudential

representative for inspection and approval was a policy issued

by the Royal Indemnity Company bearing No. RKF 63-53-78,

which named the Trustees of the Ceniral Manufacturing District

as the assured, which policy contained, among other things, a

Schedule of Properties covered by the said policy, which

schedule showed that the A&P grocery warehouse was included

in said policy as Item No. 3 and insured for an amount of

$2,400,000 with a 90% co-insurance provision, and the A&P

grocery garage was included in said policy as Item No. 5 and

insured for an amount of $240,000 with a 90% co-insurance

provision (Exhibit No. 2).

Among the assignments of insurance produced by the CMD

representatives at said closing were two assignments, executed by

the Trustees of the Central Manufacturing District by James F.

Donovan. Attached to one of such assignments was the cover

page of Royal Indemnity Company Policy No. RKF 63-53-78

and a copy of the Schedule of Properties covered, with a red

lining under the property identified as the A&P grocery ware-

house, Item No. 3, which was insured for $2,400,000. Attached

to the other assignment was the cover page of the same Policy

No. RKF 63-53-78 and a copy of the same Schedule of

Properties, with a red lining under the property identified as

A29

the A&P grocery garage, Item No. 5, which was insured for

$240,000 (copies of each assignment, cover page and Schedule

of Properties covered being attached hereto as Exhibits Nos. 3,

4, 5, 6, 7, and 8, respectively).

That all of the documents were examined, including the

aforementioned assignments of the Royal Indemnity Policy

No. RKF 63-53-78, the cover page, and the Schedule of

Properties covered and checked against a checklist, and

approved by Mr. Hitt, the attorney representing Prudential, in

the presence of the representatives of CMD. That after so

examining the documents he (Hitt) pushed the evidences of fire

insurance and the executed assignments wherein CMD assigned

its interest in said policies to Prudential across the conference

table to Messrs. Rumbaugh and Berg with the request for them

to take care of the details of delivering the assignments of the

insurance policies to the proper insurance carriers for approval

and acceptance. Mr. Hitt then delivered a check issued by

Prudential covering the purchase of the last 18 parcels; Messrs.

Rumbaugh and Berg accepted redelivery of the evidences of

fire insurance and the executed assignments of said policies and

agreed to comply with Mr. Hitt’s request. The meeting

adjourned.

The evidences of fire insurance and the executed assignments

thereof were carried by either Mr. Berg or Mr. Rumbaugh

from the meeting room to the Office of CMD. The evidences of

fire insurance and the executed assignments ‘thereof were

delivered to the CMD Insurance Manager, John S. Sproul,

with the same instructions to deliver the assignments to the

proper insurance companies or their agents and arrange to have

the various insurance companies accept the assignments and to

furnish to CMD a notice of the acceptance. Contrary to said

instructions and without knowledge of any personnel connected

with CMD or Prudential, the said Sproul did not forward any

of the assignments to the designated insurance companies and

said assignments were still undelivered and unaccepted by the

various insurance companies as late as May 31, 1973. On or

A30

about May 30, 1973, CMD personnel discovered that Sproul

had failed to carry out the instructions given to him after the

fourth closing (1-4-73). -

16. Early on Sunday morning, May 27, 1973, a fire

occurred in the Crawford Industrial Development of the CMD.

Among the buildings destroyed or damaged were the two

buildings insured under the Royal Indemnity Policy RKF

63-53-78, namely, the A&P grocery warehouse located at

4404 West District Boulevard, Chicago, which was destroyed

(see picture taken after the fire, attached hereto as Exhibit

No. 9) with a loss at least equal to the insurance in the sum

of $2,400,000 provided for on that building (Item No. 3) in

the Royal Indemnity Policy and the A&P grocery garage (Item

No. 5) located at 4330 West 4lst Street, Chicago, Illinois,

which was damaged in the amount of $15,729.

17. Monday, May 28, 1973, was a legal holiday (Memorial

Day) in the State of Illinois. On Tuesday, May 29, 1973, CMD

notified Corroon & Black-Alexander & Company, General

Agents for the Royal Indemnity Company, that in the fire which

occurred on May 27, the A&P grocery warehouse was destroyed

and the A&P grocery garage was damaged. On or about

June 7, 1973, the Royal Indemnity Company and the General

adjustment Bureau requested CMD to sign a Non-Waiver

Agreement; CMD complied (a copy of the Non-Waiver Agree-

ment is attached hereto as Exhibit No. 10). Pursuant to the

request of the General Adjustment Bureau, certain documents

and other information was furnished by CMD, as outlined in a

letter dated June 29, 1973 to the General Adjustment Bureau

(copy of which letter is attached hereto as Exhibit No. 11).

Likewise, pursuant to the request of the attorneys (Messrs.

Clausen, Hirsh, Miller & Gorman) representing the Royal

Indemnity Company, the CMD furnished to said law firm copy

of the Agreement dated November 22, 1972 between the

Trustees of the CMD and Prudential, together with the copies

of the exhibits attached thereto (see Exhibit No. 1).

— TY eh ed eas ett

0 oe

A31

18. On June 21, 1973, at the request of Mr. John P.

Gorman of the law firm of Clausen, Hirsh, Miller & Gorman,

CMD did produce at the Office of Clausen, Hirsh, Miller

& Gorman:

Messrs. John S. Sproul, Robert Schaefer, James Rumbaugh,

Melvin Long, and John Berg

for the purpose of answering questions propounded by

Mr. Gorman, under oath, with reference to the documents,

closing procedures, and sale of the two parcels of real estate

involved in this action. |

19. That on July 2, 1973, there was delivered to the Office

of CMD a letter dated June 29, 1973, signed by Mr. John M.

Beres, Secretary of the Royal Indemnity Company, advising the

CMD that that company (Royal Indemnity) denied any and all

liability for loss sustained as a result of the fire which occurred

on May 27, 1973, for the reason that CMD’s insurable interest

in the property terminated on January 4, 1973 and enclosed

with the letter its check in the amount of $5,228.00 representing

the return premium applicable to Item No. 3 and Item No. 5

for that period of the policy term subsequent to January 4, 1973.

Copy of said letter is attached hereto as Exhibit 12. That

immediately upon receipt of Exhibit 12 and the check enclosed

therewith, CMD addressed a letter to the Royal Globe Insur-

ance Companies and returned the above-mentioned check in

the amount of $5,228.00 to the Royal Globe Insurance

Companies, copy of said transmittal letter and receipt being

attached hereto as Exhibit No. 13.

20. That on July 20, 1973, there was delivered to the

Royal Indemnity Company sworn statements of Proofs of Loss

by CMD. That thereafter, on August 10, 1973 Royal rejected

and returned said Proofs of Loss to CMD and again denied any

and all liability under its policy, exclusive of its return premium

check in the sum of $5,228.00 for the reasons previously stated

in its earlier letter of June 29, 1973, a copy of which is attached

hereto as Exhibit No. 14.

A32

APPENDIX D.

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

Chicago, Illinois 60604

September 22, 1976

Before

Hon. WALTER J. CUMMINGS, Circuit Judge

Hon. Puitip W. Tone, Circuit Judge

Hon. HARLINGTON Woop, JrR., Circuit Judge

W. Woop PRINCE and JAMES F. Dono-

VAN, as Trustees of the Central er

States District Court

Manufacturing District, :

Plaintiffs-A ppellants, ~ _ a

> em Division.

) Appeal from the United

vs.

No. 73 C 3195

No. 76-1061 William J. Lynch,

ROYAL INDEMNITY COMPANY,

Judge.

Defendant-Appellee. J

ORDER

On consideration of the petition for rehearing filed in the

above-entitled cause, all of the members of the panel having

voted to deny a rehearing,

IT IS ORDERED that the petition for rehearing in the above-

entitled cause, be and the same is hereby, DENIED.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.