Appeal from judgment in favor of plaintiff insured, against defendant insurance company on a business liability policy, in the United States District Court for the Southern District of New York, John M. Cannella, Judge with a jury.
Hays, Anderson and Feinberg, Circuit Judges. Hays, Circuit Judge.
National Screen Service Corporation, the insured, commenced the present action on an insurance policy in the Supreme Court of New York seeking recovery against United States Fidelity and Guaranty Company, the insurer, for refusing to defend and pay various claims asserted by third parties against National. The suit was removed to the District Court for the Southern District of New York, on the basis of diversity, pursuant to 28 U.S.C. § 1441 (1964 ed.). The District Court rendered judgment for National and USF & G appeals.
The facts are these: National, the appellee, is engaged in the business of producing and distributing motion picture "trailers," more commonly known as coming attractions and other motion picture display material. None of the material was ever sold to exhibitors, but rather was licensed for theatre use. When the trailers were no longer of any use they were returned to National, which in accordance with a continuing agreement with the Eastman Kodak Company, sent all worn out film which it could no longer use to that company at Rochester, New York. The film was shipped, by transportation selected and paid for by National, to Kodak's Rochester facility where the film was examined to determine whether there was sufficient silver compound remaining on the face of the film to make salvage feasible. In practice Kodak accepted and paid for all scrap film which was tendered to it, though the amount of payment varied according to suitability of the film for salvage. Kodak had the right, however, to reject any shipment.
The present suit involves an incident which occurred on June 24, 1954. National had in force on that date a "Comprehensive General Liability Policy" issued to it by the appellant, USF & G, on December 31, 1953 for a one year period. The policy protected National against all potential liability for negligence in connection with the conduct of its business, which was declared on the face of the policy to be "motion picture previews-displays," except to the extent that the policy explicitly excluded coverage for certain risks. The policy obligated USF & G to defend National in any suits brought against it "alleging such injury, sickness, disease or destruction and seeking damages on account thereof . . ."; it also contained a number of exclusion clauses, two of which are particularly relevant to this case. First, the so-called "products hazard exclusion" provided that the policy did not cover "products hazard as defined in the policy." The definition was as follows:
"The term 'products hazard' means (1) the handling or use of, the existence of any condition in or a warranty of goods or products manufactured, sold, handled or distributed by the Named Insured, other than equipment rented to or located for use of others but not sold, if the accident occurs after the Insured has relinquished possession thereof to others and away from premises owned, rented or controlled by the Insured or on premises for which the classification stated in Division (a) of the declarations or in the Company's manual excludes any part of the foregoing;"
It was apparently the purpose of that exclusion to place a certain limit on the coverage for products liability of the kind imposed by MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050 (1916) (Cardozo, J.). See also La Rocca v. Farrington, 301 N.Y. 247, 250, 93 N.E.2d 829, 830 (1950). Second, there was a clause which excluded liability for "injury to or destruction of property arising out of . . . blasting or explosion . . . while such operations are being performed by the Named Insured."
A few days before June 24th, National had filled with scrap film and sealed several steel drums, and readied them for shipment to Kodak. On June 24th the Wayland Transfer Co. called for the drums at National's Charlotte, N.C. premises and furnished National with a non-negotiable uniform straight bill of lading. Wayland had been retained by the Southern Railway Co. to make the pick up and to transport the drums to the railroad's local freight depot, whence they were to be shipped to Kodak by rail. After the drums arrived at the depot they remained on the outdoor platform for several hours until they were moved inside. Later in the day a fire, allegedly caused in part by the combustion or explosion of National's film, occurred at the depot, causing damage to the property of a number of innocent third parties, who in due course asserted claims against National for negligence and sought to recover for their losses. National, in turn, gave timely and sufficient notice of the claims against it to USF & G and requested that the insurance company undertake to defend the claims. After an investigation, however, USF & G disclaimed any liability, for two reasons: first, on the ground that liability was excluded under the "products hazard exclusion," and second, that the damage was caused by explosion, a risk which was explicitly excluded from coverage. As a result of the insurance company's refusal, National had to retain its own local counsel in North Carolina. Ultimately the claims were settled for a total of $25,201.50 and legal fees, conceded by USF & G to have been reasonable, were incurred in the amount of $7,500.
In the district court, the trial centered around the issues of whether or not either of the two exclusion clauses precluded coverage for the losses sustained by National. The court submitted for determination by jury the questions of "whether the exclusion clause in the insurance contract covering explosions was applicable to the events in question," and whether or not the loss was occasioned by explosion. A general verdict for the plaintiff was returned. The district judge reserved for his own determination "the question of the applicability of the products liability exclusion clause . . ., the issue of damages and the defendant's post-trial motion to set aside the verdict . . . or in the alternative for a new trial." In a careful opinion the district judge held that the insurer was liable to National. We affirm.
USF & G urges that it was absolved from liability for the loss incurred by National by the terms of the products hazard exclusion, because the loss occurred, in the words of the policy, "after the Insured has RELINQUISHED POSSESSION thereof to others and away from premises owned, rented or controlled by the Insured . . . ." The central issue thus is whether National had possession of the film at the time of the loss, and that question in turn depends upon whether the word "possession" as used in the policy clause should be read to include the concept of "constructive possession" as well as actual possession.
The trial judge held that (1) National's business, was such that it was "not in a position to require it to purchase products liability coverage and that as such the products hazard exclusion would have no application to the facts present . . ." He also found that, in any case, the word "possession," as used in the exclusion clause, included constructive as well as actual possession, and that therefore, since National still retained constructive possession of the drums at the time of the loss, USF & G remained liable on the policy.
We think that it is not necessary to reach the question of whether National's business was such that it should have carried products liability insurance, as it is our opinion that the products hazard exclusion did not affect the coverage in this case.
Since the policy in question was issued by USF & G from its principal office in New York, the law of that state governs this case, as the parties concede. Fleet Messenger Service v. Life Insurance Company of North America, 315 F.2d 593 (2d Cir. 1963). We are of the opinion that on the facts here presented the New York courts would construe the word possession broadly to include constructive as well as actual possession. The relevant case law in New York evinces a very strong tendency to favor the insured when construing words of ambiguous meaning in insurance contracts. There is a general tendency in a majority of jurisdictions to apply the principle of contra proferentem and thus to choose the construction ...