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Tarzian v. West Bend Mut. Fire Ins. Co.

AUGUST 12, 1966.

GEORGE M. TARZIAN, ET AL., PLAINTIFF-APPELLEES,

v.

WEST BEND MUTUAL FIRE INSURANCE COMPANY, A CORPORATION, ET AL., DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Cook County; the Hon. SAMUEL B. EPSTEIN, Judge, presiding. Judgment adverse to defendants reversed and cause remanded.

MR. JUSTICE DEMPSEY DELIVERED THE OPINION OF THE COURT.

Rehearing denied October 20, 1966.

This is an action by three partners, who were engaged in the business of designing and manufacturing machinery, upon fire insurance policies issued to them by the defendants, West Bend Mutual Fire Insurance Company and Badger Mutual Insurance Company. The action sought recovery for damage to four items of special machinery being built by the plaintiffs under a contract with the United States Air Force by reason of a fire occurring March 8, 1957, in an adjoining building. The damage was inflicted by debris from the adjoining building falling upon the machinery which was located in the rear yard of the plaintiffs' premises. A portion of the damage occurred during the early stages of the fire; another portion was inflicted during the course of wrecking operations ordered by the City of Chicago on the adjoining building.

The plaintiffs filed their complaint in December 1957, claiming there was due from the defendants a sum in excess of $9,214.50 and asking a total of $15,000 damages. Their amended complaint, filed in 1961, asked for a total of $50,000 damages. In each complaint the plaintiffs alleged the issuance of the policies, that the machinery was damaged as a direct result of the fire and that they had complied with all of the conditions of the policies except as to the filing of a timely proof of loss, but that compliance with this condition had been waived by the defendants. The defendants' answer admitted the issuance of the policies but denied that the loss was a direct result of the fire and that there had been a waiver of the proof of loss requirement.

In both complaints there were additional counts alleging that the Cleveland Wrecking Company, which was engaged by the City of Chicago to demolish the adjoining building, negligently performed the wrecking operations causing a portion of a wall to fall upon the machinery; that the City of Chicago and its Deputy Fire Commissioner, Albert H. Petersen, improperly ordered the demolition of the adjoining building, and that the owners and tenants of that building negligently operated the building thus causing the fire which damaged the machinery. All of these allegations were denied by the respective defendants.

When the case was called for trial, the plaintiffs settled with the owners and tenants of the adjoining building for $3,000 which amount, by stipulation, was to be subtracted from any amount awarded by the verdict. As to these claims the defendants waived any subrogation rights granted to them under the fire insurance policies. After a jury was selected to try the remaining counts there were further settlement negotiations. As a result of these negotiations a mistrial was declared and the counts against the City of Chicago, the Cleveland Wrecking Company and Deputy Fire Commissioner Petersen were severed and submitted to the court sitting without a jury. The court entered judgment on the severed counts in the amount of $5,000. As to this amount the defendant insurance companies did not waive their subrogation rights.

The case then proceeded to trial against the insurance companies before a new jury. At the close of all the evidence the trial court directed a verdict against the defendants and the jury assessed the amount of the damage at $12,750. From this amount the court deducted the $8,000 received from the other defendants and added to the $4,750 balance interest and attorney fees for unreasonable and vexatious delay in payment of the plaintiffs' loss. The total amount was apportioned between the two defendant companies according to the coverage of their respective policies and judgments were entered against them.

The defendants contend that the trial court erred in directing a verdict against them, in not directing a verdict in their favor and, alternatively, in not submitting the case to the jury in that the policy requirement concerning the filing of the proof of loss had not been complied with and had not been waived. They also contend that the loss was plainly excluded from the coverage of the policies; that the policies were rendered void because of the fraud and false swearing of the plaintiffs in connection with their proof of loss, their examination under oath and their testimony at the trial; that the plaintiffs were not the owners of the claim because prior to the trial they had transferred the partnership assets to a corporation; that the agreed judgments against the City and Cleveland Wrecking Company destroyed their subrogation rights against those parties and thus precluded the plaintiffs from maintaining this action, and that the award of interest and attorney fees was error.

The plaintiffs argue that the defendants are estopped from raising points in this court pertaining to the exclusion from coverage, the alleged false swearing, the ownership of the claim and the loss of subrogation rights because such matters are affirmative defenses which were not pleaded by the defendants as required by the Civil Practice Act (Ill Rev Stats (1963) c 110, § 43(4)). We will consider the plaintiffs' argument and will take up in order each of the above defenses.

First of all, as to the exclusion from coverage: the case was tried by both parties on the issue of whether the loss was excluded from the coverage of the policies, and it does not appear to us under the circumstances of this case that the effect of the exclusion clause, hereinafter discussed, was affirmative matter required to be set forth specifically in the defendants' answer.

[1-3] While it is a general rule that a party will not be permitted to argue on appeal a defense not interposed by his answer (Ariola v. Nigro, 16 Ill.2d 46, 156 N.E.2d 536 (1959); Consoer, Townsend & Associates v. Addis, 37 Ill. App.2d 105, 185 N.E.2d 97 (1962)) various exceptions have been developed to prevent any injustice resulting from its strict application. A defendant may avail himself of a defense which he fails to plead if it is introduced by his adversary, particularly where the defendant prior to trial did not have information enabling him to plead the defense. See 41 Am Jur, Pleading, § 118, p 371; 71 CJS, Pleading, § 101, p 248, and the cases cited therein. The rationale of this exception would seem to be consistent with that of section 43(4) of the Civil Practice Act: any matter known to the defendant which would be likely to take the plaintiff by surprise should be set forth, but if unknown to the defendant prior to trial he likewise should be protected from surprise.

The next affirmative defense pertains to the alleged false swearing of the plaintiffs. The sworn proof of loss tardily filed by the plaintiffs on June 21, 1957, claimed that the cost of labor to repair the damaged equipment to that date was $7,614 and that the approximate labor and material to complete the repair was $837.50. On August 27, 1957, the plaintiff Tarzian was examined under oath, in accordance with the provisions of the policy, and testified that the labor charges to that date were $8,235 and that actual material cost was $700.57. At the time of his testimony only one of the four components had not been shipped to the Air Force. At the trial, however, he testified that the labor cost for repairing the four components was $35,838.90, although the material cost remained at $700.57. The defendants claim that the gross variance between Tarzian's earlier testimony and his testimony at the trial brings into play the fraud provisions of the policy which provided that in case of "any fraud or false swearing by the insured" whether before or after a loss, the entire policy shall be void.

[4-6] In Insurance Companies v. Weides, 14 Wall 375, 20 L Ed 894 (1872) the United States Supreme Court said:

"It is true the policies stipulated that fraud or false swearing on the part of the insured should work a forfeiture of all claim under them. The false swearing referred to is such as may be in the submission of preliminary proofs of loss, or in the examination to which the assured agreed to submit. But it does not inevitably follow from the fact that there was a material discrepancy between the statement made by the plaintiffs under oath in their proofs of loss, and their statements when testifying at the trial that the former were false, so as to justify the court in assuming it, and directing verdicts for the defendants. It may have been the testimony last given that was not true, or the statements made in the proofs of loss may have been honestly made, though subsequently discovered to be mistaken. It is only fraudulent false swearing ...


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