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Royal Indem. Co. v. Factory Mut. Ins. Co. - 786 N.W.2d 839 (Iowa 2010)

Rule:

The appellate court must scrutinize the terms of the contract to determine whether the damages were within the contemplation of the parties. The nature and terms of the contract necessarily dictate the damages recoverable.

When scope of liability arises in a negligence case, the risks that make an actor negligent are limited to foreseeable ones, and the factfinder must determine whether the type of harm that occurred is among those reasonably foreseeable potential harms that made the actor's conduct negligent. 

Facts:

An insurance company (primary insurer) sought damages in a negligence and breach of contract action, claiming defendant excess insurer negligently maintained an insured's warehouse fire alarm and sprinkler systems, resulting in a complete loss of inventory for the insured after a fire at the insured premises. The cause of the fire was never determined, nor was it ascertained why there was insufficient water pressure to effectively fight the fire. The excess insurer had provided loss prevention services to the insured under a separate contract from the excess insurance contract, which included fire alarm and sprinkler inspection services. Inspection services were performed at the warehouse where the fire occurred before the insured leased it and moved its inventory there. The insured filed a negligence and breach of contract action against the excess insurer; the primary insurer was subrogated to the insured's claims. The district court awarded plaintiffs $39.5 million in damages, but decreased the jury award by a pro tanto credit. The trial court granted the excess insurer's motion for a directed verdict on the negligence claim. On appeal, the excess insurer argued there was insufficient evidence that it breached any contract with the insured, and the primary insurer's claim was barred under Iowa Code § 517.5 (2001), Iowa's inspection immunity statute. 

Issue:

Was the excess insurance company liable for the losses sustained by plaintiffs?

Answer:

No

Conclusion:

The Supreme Court of Iowa reversed the judgment and remanded the case for dismissal of all claims. As to the breach of contract claim, there was no evidence that the insured communicated to the excess insurer any special circumstances that would lead it to believe it would be liable for any and all problems that may have resulted from the insured leasing that facility based on the inspection. The court determined that the verdict must be overturned as the damages awarded were not in the contemplation of the parties when they entered into the agreement, and were not foreseeable as a matter of law. As to the negligence claim, the court found that the loss to the inventory was outside the scope of liability. The primary insurer failed to prove that a condition or deficiency overlooked by the excess insurer in its inspection increased the risk of the loss that actually occurred. The court did not decide issues under the inspection immunity statute based on its determination that the primary insurer was not entitled to recover the claimed damages.

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