Court Says Farm Liability Policy’s Exclusionary Language Negated Coverage of Custom Feeding Endorsement
The plaintiffs, a married couple, operated a small farming business and borrowed money to build a small hog facility that was ultimately constructed 120 feet from their home. After the building was constructed, they began contract-feeding pigs for another party. The contract with the pigs’ owner required the plaintiffs to feed, care for, and manage the pigs supplied to them. They were also required to maintain insurance on the building and hogs, and ensure coverage in the event of suffocation of the animals. Accordingly, the plaintiffs purchased a custom feeding endorsement to their comprehensive general farm liability policy to protect themselves against potential death loss in the hogs that they were caring for. While the plaintiffs were cleaning out the manure basins in the fall of 2008, 535 feeder pigs suffocated to death in the plaintiffs’ building. There was no dispute that the hogs were under the care, custody, and control of the plaintiffs at the time of their deaths.
The plaintiffs filed a claim under the custom feeding endorsement for the loss of the pigs. At stake was $24,075 as a result of the death loss to the pigs. The claim was denied, and the plaintiffs sued the insurance company for breach of contract. The insurance company counter-claimed seeking a declaratory judgment that the policy did not provide coverage. Both parties filed motions for summary judgment. The plaintiffs argued that the custom feeding endorsement was clear in terms of its impact on the exclusionary language in the policy and that, as a result, the loss was covered. Alternatively, the plaintiffs argued that the custom farming endorsement language as read with the general policy language was ambiguous and should be construed against the drafter of the insurance contract (the defendant) and in their favor. As a fall-back argument, the plaintiffs argued that their reasonable expectations were that they had coverage for death loss of the pigs under the custom feeding endorsement. Indeed, the agent that sold them the endorsement knew that the plaintiffs were seeking coverage for death loss of the pigs raised under a custom feeding arrangement. The trial court agreed with the plaintiffs that their reasonable expectations based on the policy language should result in coverage for the death of the pigs. The trial court granted summary judgment for the plaintiffs.
On appeal, the Court of Appeals affirmed on the basis that the plaintiffs had reasonable expectations that the coverage would apply to their circumstances and that they expected the endorsement to cover the death loss of the hogs. Boelman v. Grinnell Mutual Reinsurance Company, 808 N.W.2d 756 (Iowa Ct. App. 2011). The plaintiffs’ comprehensive liability policy provided protection against property damage. Coverage A protected against liability to the public for property damage, but did not cover property that was damaged while under the “care, custody, or control” of the insured. Coverage A-1 protected against liability for property owned by others that was under the care of the insured. This provision (exclusion 6(a)), however, did not cover any losses arising out of a custom farming operation in which annual gross receipts exceeded $2,000. There was no question that the plaintiffs’ contract-feeding operation was a custom feeding operation as defined by the policy. As noted above, the plaintiffs also purchased a Custom Feeding Endorsement for which they paid an additional premium. The endorsement specifically altered the custom farming exclusion under the general policy under exclusion 6(a) of the general policy to allow for liability for property damage arising from a custom feeding operation when gross receipts were not more than $150,000. The custom farming endorsement stated that it applied “UNDER ANY OF THE COVERAGES.” This language was in bold and in all caps. As such, the plaintiffs argued that the endorsement negated the “care, custody or control” exclusion under Coverage A and the “custom farming” exclusion under Coverage A-1. The defendant, on the other hand, argued that the endorsement only modified exclusion 6(a), and that the exclusion was not intended to provide the plaintiffs with universal or unlimited coverage. The court determined that each party’s policy and endorsement interpretation was reasonable, and that the policy was, therefore, ambiguous. As a result, under contract law, the ambiguity was construed against the drafter. The court noted that it was the defendant’s obligation to define any limitations or exclusionary clauses in clear and explicit terms, and that the defendant failed to do so. The trial court’s award of summary judgment for the plaintiffs was affirmed.
The defendant insurance company sought further review by the Iowa Supreme Court. Such review was granted, and the Iowa Supreme Court held that the policy was unambiguous and did not cover the death loss of the pigs. The Court held that the Custom Feeding Endorsement, upon which the plaintiffs relied, only applied to the custom farming exclusion and did not alter or supersede any other exclusion. Thus, the Court reasoned, Coverage A property damage was excluded from coverage because the property was under the care, custody, and control of the plaintiffs. Further the custom farming exclusion is applicable to all coverage under the policy. The Court further reasoned that the custom farming exclusion prevented the insurance company from becoming an insurer of the plaintiffs’ obligations under the agreement to raise pigs for another person. Likewise, the Court noted, the insurance policy provided coverage under Coverage A-1 for property damage that was within the plaintiffs’ care, custody, and control, but not if it arose from the custom feeding operation if the operation has gross receipts of more than $2,000. The Court concluded that the Custom Farming Endorsement only modified coverage by raising the threshold for when the exclusion for damage caused by a custom farming operation took effect. This endorsement raised the threshold for coverage in exclusion 6(a) from $2,000 to $150,000, but did not, according to the Court, alter the exclusion under Coverage A for damage caused to property under the care, custody, or control of the plaintiffs. However, the Iowa Supreme Court did not address the fact that the custom farming endorsement specified in bold and in all caps that the endorsement applied “UNDER ANY OF THE COVERAGES.” While both the trial court and the Court of Appeals addressed that point, the Supreme Court chose to ignore it.
In refusing to conclude, as did the Court of Appeals and the trial court, that the policy as a whole was ambiguous, the Court asserted that its conclusion “is consistent with existing law.” To support its position, the Court cited Grinnell Mutual Reinsurance Co. v. Schwieger, 685 F.3d 697 (8th Cir. 2012), in which that court held that a comparable custom feeding endorsement involved in that case did not preempt the “care, custody, or control” provisions in the basic policy. However, that court (which reversed a Minnesota federal district court decision) based its opinion largely on a Minnesota Court of Appeals decision filed in late 2011 which is not precedential. Gaza Beef, Inc. v. Grinnell Mutual Reinsurance Co., No. A11-444, 2011 Minn. App. Unpub. LEXIS 794 (Minn. Ct. App. Aug. 22, 2011). The Eighth Circuit in Schwieger made no reference to the Iowa Court of Appeals decision in the present action involving the same insurance company and the same policy language. Boelman v. Grinnell Mutual Reinsurance Co., 808 N.W.2d 756 (Iowa Ct. App. 2011). The defendant knew about the unfavorable opinion it had received in this case in the Iowa Court of Appeals, but did not disclose the ruling to the Eighth Circuit or the other party’s counsel. When opposing counsel learned of the ruling and the failure to disclose it, rehearing was requested of the Eighth Circuit, but was denied. As a result, the Eighth Circuit boot-strapped a non-precedential Minnesota Court of Appeals decision as the primary rationale for its holding in favor of the insurance company on the custom feeding endorsement. The Iowa Supreme Court was aware of these developments when it cited the Eighth Circuit opinion for support of its statement that its conclusion was “consistent with existing law” with respect to the custom farming endorsement.
The Iowa Supreme Court then turned to the plaintiffs’ claim that by excluding coverage, the policy did not meet their reasonable expectations that they would be covered in the event of loss arising from the custom feeding operation, so the doctrine should apply. The Court noted that the reasonable expectations doctrine is not an equitable remedy to expand coverage, but can be invoked only when an exclusion is bizarre or oppressive, eviscerates terms explicitly agreed to, or eliminates the dominant purpose of the transaction. Only representations made by the insurer at the time of the negotiation and issuance are relevant. If the doctrine applies, the objectively reasonable expectations will be upheld even if a painstaking study of the policy would have established that no coverage applied. But, the Court stated, the plaintiffs failed to meet a mandatory prerequisite for the doctrine to apply--evidence that the insurer fostered coverage expectations or that the policy could not be understood by an ordinary person. The plaintiffs failed to conduct any discovery or provide any proof in the record to establish the reasonable expectation doctrine. In addition to the lack of evidence, the doctrine does not apply because the policy is not ambiguous. What the Court failed to note, however, was that the procedural posture of the case below was on cross motions for summary judgment. Thus, the plaintiffs intentionally did not offer into evidence any affidavit concerning the statements made by the defendant’s agent at the time the custom feeding endorsement was purchased. Had such an affidavit been entered into evidence at the trial court, it would have raised a fact issue that would have required a trial on the matter. A trial is what the plaintiffs were trying to avoid because they are small producers that could not afford a trial over a $24,075 claim. Indeed, the trial court determined that the policy as a whole was clear and that the plaintiffs’ were reasonable in expecting coverage under the policy.
The Court also pointed out that the additional premium expense for the custom feeding endorsement was so minimal that it did not “correlate with the substantially elevated risk they [the defendant] would have assumed if they [the defendant] had removed all exclusions touching upon the Boelmans’ custom farming operation.” However, the Court made this relation between premium paid and risk assumed without such evidence being in the record. What the Court did not make mention of (even though it had such information) was that the defendant or its agent had whited-out the additional premium on the declaration page of the policy, making it look as if the plaintiffs had paid nothing additional for the custom feeding endorsement.
The Court’s opinion is highly suspect on several counts for the legal reasoning employed. The tactics employed by the defendant would also appear to be a poor business decision. The defendant could have simply paid the relatively small amount claimed under the policy and change the policy language to clear up any confusion. Indeed, the defendant now sells another endorsement that covers livestock death by suffocation. Boelman v. Grinnell Mutual Reinsurance Co., No. 11-0570, 2013 Iowa Sup. LEXIS 9 (Iowa Sup. Ct. Feb. 1, 2013).
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