APPEAL from the Circuit Court of Cook County; the Hon. EDWARD
F. HEALY, Judge, presiding.
MR. JUSTICE GOLDBERG DELIVERED THE OPINION OF THE COURT:
This appeal presents a situation in which able counsel on both sides of a controversy strive to apply divergent legal theories to a case in which the material facts are virtually admitted. The matter involves liability of Allstate Insurance Company (plaintiff) upon two policies of fire insurance covering a building and its contents in Springfield, Illinois. The action was brought for declaratory judgment. (Ill. Rev. Stat. 1973, ch. 110, par. 57.1.) The defendants originally were: National Tea Co. (National), lessee of the building and operator of a supermarket therein; C.W. National Springfield, Ill., Inc. (C.W.), lessor and owner of the building; and also Franklin Life Insurance Company. The latter company, originally represented by separate counsel, owned a mortgage secured by the building. The parties in interest agreed that it has sustained no loss by virtue of the facts herein. It has not joined in this appeal. The two remaining parties defendant will be referred to collectively as "defendants."
After hearing the evidence, the trial court sustained plaintiff's position and declared the policies void and of no force and effect from their inception "by virtue of the lack of a meeting of the minds between the parties herein * * *." Defendants appeal.
Prior to the events in question here, National had placed all of its nonsprinklered stores, pertaining to both buildings and contents, under blanket policies provided by insurance companies other than plaintiff. For some years prior thereto, National had been assisted in its insurance problems by an insurance counselor or broker (Oliver Wheeler) with 30 years of experience in this field. In a written stipulation of fact, the parties agreed that this broker acted as agent of defendants in dealing with Allstate to procure proper and sufficient fire insurance coverage.
National maintained insurance coverage on more than 500 supermarket locations. Obtaining this for buildings without sprinkler systems was difficult. Lengthy negotiations concerning a new program were held during 1968 and 1969 between representatives of the parties including an account executive for plaintiff (Walter Mulvihill), plaintiff's senior underwriter (Edwin Hoffman), National's insurance manager (Frank Femyer), defendants' broker and others. Plaintiff's representatives consistently took the position that they would not consider insurance on any nonsprinklered supermarket by itself and that they would consider placing the entire coverage on such properties only upon a retrospective premium formula together with a $100,000 deductible clause pertaining to each occurrence. On the contrary, policies would be issued upon an individual basis without these requirements for sprinklered locations. As a result of these negotiations, the conditions advanced by plaintiff became a firm understanding. In due course Allstate provided National with fire insurance on seven locations equipped with automatic sprinkler systems but did not write any insurance on supermarkets not thus equipped.
As regards the subject premises, 920 North Grand Avenue East, in Springfield, Illinois, defendants' broker called the senior underwriter of plaintiff during July of 1969 and stated that insurance was required upon a new store about to open. He did this at the specific request of National's insurance manager. The broker was asked by the underwriter if this location was sprinklered and he replied affirmatively with the added statement that this was "a brand-new building." This information was confirmed by a written memorandum sent to the underwriter by the broker on July 5, 1969, which described the subject premises as a "Sprinklered (Brick) Bldg." In truth and in fact, the subject property was not provided with a sprinkler system. Two of National's agents, its real estate manager and its construction superintendent, were familiar with construction of the store upon the premises. They knew that it had no sprinkler system.
In due course, plaintiff issued two insurance policies in the usual form. One policy, issued to C.W., covered the building in the amount of $314,000 and sprinkler leakage on the building in the amount of $35,000. This policy had a typewritten endorsement, "It is understood and agreed, rates and premiums are tentative, subject to establishment of final rates by the Illinois Inspection and Rating Bureau." The other policy ran to National and covered contents in the amount of $400,000 and sprinkler leakage on the contents for $110,000. It contained a similar clause concerning rate adjustment. Both of these policies contained not only the sprinkler leakage coverage but also a provision requiring the insured, as a condition of the policy, to use due diligence to maintain the sprinkler system and water supply "in complete working order * * *." These policies also gave plaintiff the right to cancel on 5 days' notice with or without cause.
The testimony of plaintiff's senior underwriter is clear and definite that, at the time of his telephone conversation with defendants' broker when the memorandum from the broker was received by him and when the policies dated July 5, 1969 were issued, he had no knowledge that the building in question was actually not provided with a sprinkler system. If he had such knowledge at that time, he would not have issued the policies. Similarly, the broker testified that he knew plaintiff would not write fire insurance on an individual basis on any property not provided with a sprinkler system and he knew the importance of his statements, verbal and written, that the premises in question were provided with a sprinkler system. The broker testified that the "pattern was such" that he believed the building had a sprinkler system.
These policies were received in due course by National's insurance manager who had 11 years of experience in his position. He read the policies and noticed that they contained sprinkler leakage insurance for buildings and contents. He noted also that they required the insured to keep the sprinkler system and water supply "in operation." He authorized payment of premiums on the policies. He was then aware that plaintiff would not accept a location without a sprinkler system. At that time, he did not know that the subject premises had no sprinklers. The subject property, if nonsprinklered, would have had automatic coverage on blanket policies held by National but he requested that the broker obtain coverage from plaintiff.
On July 14, 1969, about 2 weeks after the effective date of the policies, the senior underwriter for plaintiff wrote a letter to the Chicago office of the Illinois Inspection and Rating Bureau, now known as Insurance Service Office of Illinois. This office is a corporation which establishes rates for fire and other related insurance upon commercial buildings based upon structural characteristics and other pertinent details. It has offices in Springfield and in Chicago. It establishes insurance rates on properties with and without automatic sprinkler systems. This service is rendered at the request of insurance companies, agents and brokers. These rates are based upon a detailed physical inspection of the property. Sprinklered and nonsprinklered buildings are handled in separate departments. There is, however, no separate department in Springfield, where the subject property is located, for handling properties with automatic sprinklers. After a rate has been set, the information is placed upon a rate card. All of these cards are retained together, without differentiation based upon the presence of a sprinkler system.
The Service Office is actually operated by a number of member insurance companies. These companies choose a governing committee which is analogous to a board of directors. However, an insurance company need not be a member of the organization but, as a so-called subscriber, it may obtain the same service. Plaintiff was a subscriber to the organization and had no vote or voice in its operation or procedure.
The letter from plaintiff to the Service Office properly and correctly gave the street address of the subject building. It described the property as "a new, sprinklered supermarket building." It requested inspection and rating. This request was brought to the attention of the assistant superintendent (Raymond Krause) of the Chicago department which dealt with sprinklered buildings. He has been associated with the organization for 25 years. Upon checking the files in his department, which pertained only to buildings equipped with sprinklers, he found a file for "902 South Grand Avenue" in Springfield. The file did not have a rate card thus indicating that the rate had not been established. In the file he found drawings for a sprinkler system being installed in a supermarket. He, therefore, on July 28, 1969, made a notation on the bottom of plaintiff's letter stating that the property would be scheduled for inspection and a rate established as soon as a certificate of completion from the contractor had been received. He retained a copy of the letter with this notation and assumed that he returned the original to plaintiff. He "assumed" that he placed the copy in the file pertaining to "902 South Grand Avenue."
He next had this situation directed to his attention on October 3, 1969. At that time, as a second request for the rate information, plaintiff caused to be sent to the Service Office a copy of the previous letter dated July 14, 1969, with a rubber stamp "Second Request" and the current date of October 3, 1969. This copy was forwarded to the Service Office. However, by October 1, 1969, a rate card for the subject premises (920 North Grand Avenue East) was on file in the Service Office in Springfield. By coincidence, that office had received a request for a rate on these premises from another insurance company effective June 9, 1969. The Springfield office did inspect the subject property for this purpose on September 12, 1969, and prepared a rate card which it held in its files with a copy to the Service Office in Chicago. The rate indicates that the subject building had no sprinkler system.
However, the assistant manager of the Service Office in Chicago did not know of the existence of this rate card. Upon receiving the second written request from plaintiff, he again looked at the file concerning the sprinklered building at 902 Grand Avenue. Accordingly, on October 7, 1969, he sent plaintiff a handwritten note stating that his files showed a supermarket located at 902-906 South Grand Avenue and that "We feel this is the property in question." He stated that the rate information would be available in about 2 months.
This communication was received by plaintiff's senior underwriter. On October 15, 1969, he wrote another letter to the Service Office pointing out that there was apparently some confusion between the "two completely separate locations." Three days later the Chicago branch of the Service Office wrote to Springfield, enclosed copies of the previous correspondence, and requested that the situation be reviewed. Four days later (October 22, 1969) the Springfield office wrote to its Chicago branch and advised that there had been a complete loss on October 17, 1969, regarding the "NONsprinklered National Food Store at 920 North Grand East."
This information proved all too true. The building upon the subject property was destroyed by fire on October 17, 1969. On October 18, defendants' broker called plaintiff's account executive and told him that the property had been destroyed by fire. Both were surprised by the total loss of a building which both believed was equipped with a sprinkler system. Thus, even very soon after the loss, neither party was aware of this mutual mistake. It was not until October 20 or 21 that any employee of plaintiff was actually informed that the premises had no sprinkler system. On October 24, 1969, plaintiff wrote to the defendants declining liability and tendering return of premiums. The letter stated that plaintiff had learned within the past week that there was no sprinkler system on the premises. The letter ...