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BUILD MART CORP. v. GENERAL INSURANCE CO. OF AMERICA

December 17, 1971

BUILD MART CORPORATION, PLAINTIFF,
v.
GENERAL INSURANCE COMPANY OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Marovitz, District Judge.

MEMORANDUM OPINION

Motion For Summary Judgment

Plaintiff is engaged in the sale of home and building supplies at a number of locations in California and at one location in Arizona. Defendant insurance company, on April 5, 1970, issued to plaintiff a "monthly reporting policy" of insurance designated "Special Multi-Peril Policy-Commercial," effective as of the date of issue and expiring on April 5, 1973. The portion of Section I of the policy relevant to this case insures plaintiff's personal property against loss of fire at the locations specified therein up to a blanket limit of $2,800,000.00. On April 23, 1970, 18 days after the inception of the policy a fire occurred at one of the plaintiff's locations. There is no factual dispute that the following figures represent the loss incurred by plaintiff as a result of the fire and that the items involved were of the type covered by the policy:

  Personal Property                                   $51,404.06
  Debris Removal                                        1,579.10
  Business Interruption                                 1,825.00
                                                      ----------
                                                      $54,808.16
  Less, special loss deductible                           250.00
                                                      ----------
  Total Loss                                          $54,558.16

The dispute, one that is a purely legal rather than a factual one, revolves around whether the entire amount can be collected under certain provisions of the policy. The "Merchandise Block Coverage Form" that is part of Section I of the policy is composed of twelve subsections that deal with the obligations, conditions and limitations of the property coverage and it is the interpretation of Subsection XII, headed "Reporting Provisions" that is here in contention.

The issue in this case being one of first impression it would be beneficial to first discuss the particular type of insurance involved before turning to the specifics and both the content and application of the REPORTING PROVISIONS in the policy in question.

The type of insurance involved is commonly known as a "monthly reporting policy" or a provisional "reporting form policy." A policy of this sort is designed to allow one who has a fluctuating stock of goods or inventories to obtain coverage that varies according to the value of these goods, the premium likewise fluctuating in proportion to inventory value at a given time. Such a policy has many advantages. It eliminates the guess work involved in attempting to project future inventory levels as of the time of the issuance of the policy and prevents the unnecessary costs of overestimating future stock and thus paying premiums for coverage above the value of that stock. It also obviates the dangers of underinsuring whereby an estimate of future inventory is too low and the loss represented by the gap between coverage and actual loss must be absorbed by the insured. When the policy is issued it contains a "provisional" premium that reflects the initial amount of coverage. The coverage is kept up to date on the basis of periodic adjustments that reflect higher or lower inventory levels. Most important to the insurer is that he is not insuring a greater risk for an insufficient premium. Thus in order to maintain a proper risk-premium ratio the insurer must have as accurate an assessment of inventory values as is possible and a monthly reporting policy usually requires the insured to report not later than 30 days after the last day of each calendar month the total actual cash value of the property at every location. The insured pays a premium based upon the average value indicated by these monthly reports; an additional premium when an excess in value over the provisional amount is indicated by the reports or he receives a refund when the provisional premium proves to be too high in proportion to the monthly value.

If the required monthly report is not filed and a loss occurs the loss is adjusted according to the values filed in the last report prior to the loss.

The monthly reporting policy also includes a "Full Reporting Clause", that requires the insured to report the full value of the property to be covered in each monthly report in order to prevent the insured from undervaluing his inventory thereby reducing his premium and increasing insurers premium-risk ratio. For this reason it has sometimes been called the "honesty clause". In the event that less than the full value of inventory to be covered is reported and a loss occurs an adjustment is made by determining the ratio of the reported value to the full value at the time of the report and then applying that same ratio to the actual loss. The formula for the full reporting clause has been illustrated as:

  Reported value     X   Loss  =  Liability
  --------------
  Actual value

See Aetna Insurance Co. v. Rhodes, 170 F.2d 111 at 112. (10th Cir. 1948). To give a simple example, assume a monthly report stated the value of inventory to be $8,000 and a premium was paid reflecting that amount of risk and subsequently a fire occurred causing damage of $1,000 but it was determined that the actual full value of the total inventory at the time of the loss was $10,000 rather than the stated $8,000. An adjustment would be made by determining the ratio of $8,000 to $10,000, that is 80%, and then applying that ratio to the loss. Thus 80% of the $1,000 loss would be covered and the insurer would only be liable for $800.

Against this general backdrop we will now turn to the specifics of this case. The policy entered into between plaintiff and defendant contains the reporting provisions common to this form of coverage:

XII. REPORTING PROVISIONS

A. PROVISIONAL AMOUNT CLAUSE:

    The amount of insurance provided for hereunder is
  provisional and is the amount on which the
  provisional premium is based, it being the intent of
  this insurance to insure hereunder the total actual
  cash value of the property described herein subject
  to the Limits of Liability for all Contributing
  Insurance. Any loss in excess of the limits stated in
  this policy shall be borne by the insured,
  ...

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