Opinion
11-21-1955
BENEFICIAL FIRE AND CASUALTY INSURANCE COMPANY, a California corporation, Plaintiff and Respondent, v. KURT HITKE & COMPANY, Inc., a California corporation, et al., Defendant and Appellant.* Civ. 20998.
John S. Bolton and F. V. Lopardo, Los Angeles, for appellant. Hill & Attias, Henry Attias and Philip Glusker, Beverly Hills, for respondent.
BENEFICIAL FIRE AND CASUALTY INSURANCE COMPANY, a California corporation, Plaintiff and Respondent,
v.
KURT HITKE & COMPANY, Inc., a California corporation, et al., Defendant and Appellant.*
John S. Bolton and F. V. Lopardo, Los Angeles, for appellant.
Hill & Attias, Henry Attias and Philip Glusker, Beverly Hills, for respondent.
ASHBURN, Justice pro tem.
Action for declaratory judgment brought by Beneficial Fire and Casualty Insurance Company against its general agent, Kurt Hitke & Company, Inc., to determine the method of computing the agent's compensation under a written contract, and to have it declared that some $59,087.48 previously paid the agent was an advance only, subject to adjustment and perhaps repayment after all earned premiums and all losses have been ascertained on the basis of actual experience. The court adopted plaintiff's contentions.
Defendant on appeal complains principally about exclusion of parol evidence as to trade customs concerning general agent commissions, offered in an effort to establish that monthly payments made to the agent were final and not provisional. Its counsel also contend that the court's construction of the contract is erroneous, even upon the assumption that parol evidence was properly excluded.
The object of the contract is described in the findings: 'Under the terms of the contract, the defendant was appointed plaintiff's 'general agent'. Defendant was authorized to underwrite and issue policies of automobile public liability insurance in the name of plaintiff covering certain substandard risks such as taxi cabs, trucks and busses, and also was to settle and adjust claims under policies written by it.'
The contract was made on February 16, 1950, and the action filed on October 14, 1952, some two and one-half years later. The instrument provides for cancellation upon 30 days written notice by either party. No such notice was given but the court found that after the filing of the complaint, 'there have been no new policies written under the contract, the term of all policies written under the contract has expired,' and 'All premiums covering the policies written by defendant under the contract have now been earned. That is, the period of coverage applicable to any premium paid in advance under any of said policies has passed. However, a number of open claims remain undisposed of, and thus not all losses to be paid under all of said policies have been paid.' These findings are not challenged.
Holding the contract to be unambiguous, the court excluded parol evidence and construed the contract by consideration of the language found within its four corners. In such circumstances, assuming that extrinsic evidence was properly excluded, the proper interpretation of the contract is a question of law for the appellate court to decide ultimately. In re Estate of Platt, 21 Cal.2d 343, 352, 131 P.2d 825; Fox v. Fox, 42 Cal.2d 49, 52, 265 P.2d 881; Meyer v. State Board of Equalization, 42 Cal.2d 376, 381, 267 P.2d 257. The interpretation thus placed upon the writing by the trial judge appears to this court to be correct, as a review of the provisions of the instrument will presently reveal.
Defendant, as such general agent, had the duty to investigate all losses and cooperate with the claim department of the company in the settlement thereof, or as stated in the findings: '[t]o settle and adjust claims under policies written by it.' Paragraph (15) of the contract prescribes a formula for computing the agent's compensation upon a contingent basis. From gross earned premiums upon all policies there shall be deducted, (a) losses and 'allocated loss adjustment expense,' and (b) a fixed charge by the company of a sum equal to 20% of such gross earned premiums, and the remainder, if any, constitutes the agent's commission, with a maximum limit of 30% of the gross earned premiums. The text of paragraph (15), except the last subparagraph thereof, is set forth in the margin. Manifestly, this provides a contingent fee which is to be accepted 'as compensation in full for all services to be performed under this contract' by the general agent--contingent because the actual losses and 'the allocated loss adjustment expense' may be so heavy as to absorb the entire premiums when added to the arbitrary deduction of 20% of gross earned premiums. Paragraph (15) is the basic compensation provision. Paragraph (14) provides for monthly payments to the agent which are necessarily interim and provisional in their nature. This paragraph calls for monthly computation made by the company of all premiums earned during the preceding month, followed by a statement to the agent of the computed amount thereof, together with 'a record of all losses and loss expense paid and of all reserves for losses incurred on a case basis.' The phrase 'reserves for losses' is plainly the equivalent of 'allocated loss adjustment expense' which is defined in paragraph (15) to be: 'Loss Adjustment expense is hereby defined to be the allocated direct and overhead cost of the General Agent of the adjustment of each claim arising under this Agreement,' and which is described in paragraph (16) as 'reserves for the outstanding losses and loss adjustment expense.' Necessarily, this item must originate in defendant's records and be furnished by the agent to the company. Counsel so conceded at the trial. In the nature of things it can be but an estimate, hence the provision in paragraph (16) for review by the company and arbitration of the item in event of dispute. That paragraph prescribes the method of arbitration and the result is stated as follows: 'And the decision of any two shall be used for the reserve in the computation of the compensation and underwriting profits provided for in Paragraph 14 until subsequent developments occur which may change the extent of liability.' Manifestly, the reserve for loss expense is an estimated provisional item originating with the agent, and so the payment based thereon normally would be subject to later adjustment. Hence the concluding sentence in paragraph (14) which, in effect, says that so long as the contract continues a deficit occurring in one month shall be offset by earnings in a later month or months before payments are to be resumed. It is to be noted that all these monthly payments are based upon reserve for losses which may prove through experience to be too large or too small to fit individual cases. Standing alone, paragraph (14) provides and suggests no methed of ultimate correction if the reserves prove to be too low. Even an arbitration under (16) is binding only 'until subsequent developments occur which may change the extent of liability.'
The last subparagraph of (15) provides for an annual computation of 'underwriting profits' in this language: 'As soon after December 31 of each calendar year as practicable, the underwriting profits arising out of the net retained business under this contract shall be computed and 50% thereof shall be payable to the General Agent. That retained business shall be defined as the net amount of risk assumed by the Company after deducting quota share reinsurance.' It was stipulated that no such profits were ever made. But this portion of (15) does enter into the problem of construction now before the court. Counsel for defendant at the trial defined the phrase 'underwriting profits' in this language: 'You see, underwriting profits have a definite definition and it, of course, includes paid losses, reserve for losses, paid loss expense, and producers' commissions which are credited to the general agent because you always have to pay your agent * * *.' Respondent's brief gives substantially the same meaning to the term.
In the case of Massachusetts Bonding & Ins. Co. v. Lundy, 8 Cir., 160 F.2d 680, 682, it is said: 'The contract related solely to division of 'underwriting profits' of the company, which in common understanding and by dictionary definition could only mean the excess of the company's income over its expense and loss from the underwriting business.' To same effect see 44 C.J.S., Insurance, § 49, p. 500; Bullion v. Aetna Ins. Co., 151 Ark. 519, 237 S.W. 716, 718. The 'reserve for losses' mentioned in defendant's attorneys' definition of underwriting profits would necessarily be a part of the computation, for no method of periodic elimination of errors in reserves is prescribed and the underwriting profit arises only after monthly payment of agent's commissions, and so this additional item of compensation to the agent remains either faulty or subject to readjustment on the basis of experience.
Paragraph 19 takes care of the whole problem. It provides for cancellation by either party upon giving of 30 days prior written notice, and then says: 'Cancellation in this instance shall apply to all provisions in the contract except those items which pertain to the compensation of the General Agent, which items shall remain in full force and effect until all premiums have been earned and losses have been paid, or until an earlier mutually agreeable date has been set. With respect to those items the Company agrees to pay the General Agent any and all amounts due the General Agent and the General Agent agrees to pay the Company any and all amounts due the Company.' Plainer language could scarcely be found to express the thought that the agent's compensation should be ultimately adjusted after termination of the contract and on the basis of actual experience. The word 'items' refers to all elements of the compensation computation and the agreement of the agent to pay the company, or the company to pay the agent, is made 'with respect to those items.' This language rules out appellant's contention that the agent's obligation to pay on final accounting refers to such things as premiums received by it and not previously turned over, a matter which is covered elsewhere in paragraphs 3, 4 and 6.
The judgment says: 'The plaintiff is entitled to a judgment decreeing and declaring that upon cancellation of the contract, and after all premiums have been earned and all losses have been paid, an accounting shall be made in accordance with the provisions of paragraph 19 of the contract. Such accounting shall follow the compensation formula set out in paragraph 15. * * * If the defendant has been paid, under the provisions of paragraph 14 of the contract, an amount in excess of such amount as the above accounting shall show it is entitled to receive as compensation, the defendant shall promptly pay to the plaintiff the amount of such excess. If the defendant has not been paid, under the provisions of paragraph 14 of the contract, the amount to which it is entitled as compensation, to be shown by such final accounting, the plaintiff shall promptly pay to the defendant the amount of compensation to which the defendant is entitled less the amount the plaintiff shall have theretofore paid to the defendant under the provisions of paragraph 14 of the contract.' No jurisdiction was reserved for the taking or approval of the accounting. This judgment reflects a correct interpretation of the contract, made without the aid of any oral evidence.
Appellant urges that these cases are to the contrary: Massachusetts Bonding & Ins. Co. v. Lundy, supra, 8 Cir., 160 F.2d 680; Aldrich v. New York Life Ins. Co., 235 N.Y. 214, 139 N.E. 245. Examination discloses that they are not opposed to the judgment rendered at bar. The Massachusetts Bonding Company case does say that the contract does not require the general agent 'to pay a loss to the company if such should result from his employment,' but the respondent does not claim, and the trial court did not hold, that defendant must bear or repay any of the losses incurred under the instant contract, only that his compensation becomes nil if the final accounting discloses that the overall operation resulted in no balance when losses and the 20% of gross earned premiums are deducted from the total of such premiums.
Respondent cites Milwaukee Mechanics' Ins. Co. v. Warren, 150 Cal. 346, 89 P. 93, and National Union Fire Ins. Co. v. Nason, 21 Cal.App. 297, 131 P. 755, as sustaining the trial court's ruling. In a measure they do so. The Milawaukee Mechanics' Insurance case dealt with a general agent's contract which prescribed as his compensation 35% of the gross premiums "after deducting all return premiums, rebates, and reinsurances." [150 Cal. 346, 89 P. 96.] The term of the agency was one year and it remained in effect some 14 months before the controversy as to the computation of the agent's compensation developed. The agent objected to being charged in an accounting between the parties with his share of premiums which had to be returned. This contention was rejected, the court saying, 150 Cal. at page 354, 89 P. at page 96: 'Certainly it was never understood by the parties that, if Warren and Lanktree wrote a policy on the day before the expiration of their agency, they would be entitled to retain 35 per cent. of the entire amount of the premium, even though on the day after they ceased to be agents the policy was canceled by the insured and the company compelled to return the greater part of the premium. It was necessarily in the contemplation of the parties that return premiums might be payable after the termination of the agency, and the right of Warren and Lanktree to retain 35 per cent. of the premiums on any business written by them was always subject to the contingency that the poicy might be canceled, and that they might, therefore, be liable to the company for 35 per cent. of the amount refunded by the company upon such cancellation. See American Steam Boiler Ins. Co. v. Anderson, 57 N.Y.Super. Ct. 179, 6 N.Y.S. 507. If it be said that under this construction there could be no final settlement of account on the termination of the agency, it may be answered that the contract plainly shows that such immediate settlement was not within the purview of the parties at the time the contract was made.'
Appellant's contention that parol evidence was improperly excluded cannot prevail, for the contract is not ambiguous, and of course that is the primary criterion upon the question of the admissibility of such evidence, Hicks v. Whelan Drug Co., 131 Cal.App.2d 110, 114, 280 P.2d 104; if received with respect to an unambiguous writing the evidence must be disregarded. Hale v. Bohannon, 38 Cal.2d 458, 465, 241 P.2d 4; 18 Cal.Jur.2d sec. 256, p. 740. Appellant's offer to show practical construction by the parties runs headlong into the parol evidence rule. Such an aid to the interpretation of a contract is admissible only in case of ambiguity. Bettis Rubber Co. v. Kleaver, 104 Cal.App.2d 821, 826, 233 P.2d 82; 12 Cal.Jur.2d, sec. 129, p. 342.
In an effort to avoid the effect of the rules just mentioned appellant's counsel rely upon section 1861, Code of Civil Procedure, and cases holding it applicable even in the absence of ambiguity on the face of the writing. The cited cases are: Ermolieff v. R.K.O. Radio Pictures, 19 Cal.2d 543, 122 P.2d 3; Wachs v. Wachs, 11 Cal.2d 322, 79 P.2d 1085; Body-Steffner Co. v. Flotill Products, 63 Cal.App.2d 555, 147 P.2d 84; Higgins v. California Petroleum & Asphalt Co., 120 Cal. 629, 52 P. 1080; Ross v. Frank W. Dunne Co., 119 Cal.App.2d 690, 260 P.2d 104; Ferris v. Emmons, 214 Cal. 501, 6 P.2d 950; Associated Lathing & Plastering Co. v. Louis C. Dunn, Inc., Cal.App., 286 P.2d 825. They deal with the meaning of specific words or phrases and rest upon the concept thus expressed by Mr. Justice Holmes in his customary felicitous phrasing: 'A word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.' Towne v. Eisner, 245 U.S. 418, 425, 38 S.Ct. 158, 159, 62 L.Ed. 372, L.R.A.1918D, 254. But the offer made at the trial was not so restricted. It went to the meaning and legal effect of the contract, not some specific word or phrase therein. We quote extracts from the offer: '* * * that never in the general agency contracts used in the insurance business for more than a hundred years has any general agent been required to return any of his earned commission under even the contingency theory * * *. It is a specialist field and it has been in existence for many hundreds of years and there are just certain things that don't occur, and one of them is that a general agent is never required to pay back out of earned commissions, as I mentioned before.' On motion for new trial appellant's counsel said, with respect to a proffer of testimony of Mr. Ray Meyer, former vice president of plaintiff: 'His testimony will be that his interpretation, his understanding of the way the contract was operated by Mr. Dillingham, Vice President for Hitke, and the Beneficial Vice President, was that it was an earned commission, not refundable at any time; that that monthly payment of earned commission was final.' Even if there were an ambiguity in the instrument, such conclusions would not be competent evidence. In Achen v. Pepsi-Cola Bottling Co., 105 Cal.App.2d 113, 233 P.2d 74, an action for declaratory relief to have franchise contracts construed so as to prohibit cancellation, the court adopted defendant's construction of the contract which gave it the right to cancel. Plaintiff had sought to introduce evidence of what some officers of defendant had stated to the effect that the contract prohibited unilateral cancellation. 105 Cal.App.2d at page 123, 233 P.2d at page 80, the court said: 'Appellants particularly point to the testimony of some of the distributors who testified that the officers of the company interpreted the language of the contracts to mean, as for instance, that the term of the contract was for an indefinite period and could not be cancelled. The short answer to the contention is that the exception to the hearsay rule which permits declarations or admissions by a party to be shown applies only to declarations or admissions of fact and not to the interpretation, legal or otherwise of the facts. Here the factual language set forth in the contracts was not only equally available, but known to the respective parties. What the language used in the contracts meant was a matter of interpretation for the courts and not controlled in any sense by what either of the parties intended or thought its meaning to be if it ran contrary to the court's interpretation of it. The views expressed by any party to the contracts were, at best, his opinion or conclusion and as such not admissible, under any exception to the hearsay rule or otherwise.'
It is likewise true that evidence of custom is not receivable in the teeth of a writing which shows that it is at variance with the alleged custom. See India Paint & Lacquer Co. v. United Steel Prod. Corp., 123 Cal.App.2d 597, 613, 267 P.2d 408; Miller v. Germain Seed, etc., Co., 193 Cal. 62, 66, 222 P. 817, 32 A.L.R. 1215.
Appellant's reliance upon section 1647, Civil Code and section 1860, Code of Civil Procedure, is misplaced. Neither of these sections authorizes the consideration of extrinsic evidence of a contract which is clear and certain on its face. Courtright v. Dimmick, 22 Cal.App.2d 68, 70-71, 70 P.2d 269; United Iron Works v. Outer Harbor, etc., Co., 168 Cal. 81, 84, 141 P. 917; Leonard v. Huston, 122 Cal.App.2d 541, 548, 265 P.2d 566; Parker v. Meneley, 106 Cal.App.2d 391, 401, 235 P.2d 101. There was no error in the exclusion of the proffered parol evidence.
Defendant appeals from the judgment and attempts to appeal from the order denying its motion for new trial. That order is not appealable and the attempted appeal is dismissed.
The judgment is affirmed.
McCOMB, Acting P. J., and FOX, J., concur.
Hearing granted; McCOMB, J., not participating. --------------- * Opinion vacated 297 P.2d 428. 1 'The General Agent agrees to accept as compensation in full for all services to be performed under this contract, and the Company agrees to pay the General Agent for the performance of such services, such compensation to be determined in the following manner: From the gross earned premium under all policies of insurance, renewals, endorsements or binders, there shall be deducted the following items: (a) Losses and allocated loss adjustment expense; (b) a fixed charge by the Company of a sum equal to 20% of such gross earned premium; (c) from the residue remaining shall be paid a sum as commission to the General Agent not to exceed 30% of the gross earned premium. 'Loss adjustment expense is hereby defined to be the allocated direct and overhead cost of the General Agent of the adjustment of each claim arising under this Agreement. The amount charged as loss adjustment expense shall be subject to review by the Company, and in the event of dispute shall be settled by arbitration as hereinafter set forth.' 2 (14) 'On or before the 30th day of each month, the Company will compute all premiums earned during the previous month and will furnish the General Agent with a statement thereof, together with a record of all losses and loss expense paid and of all reserves for losses incurred on a case basis. At such time the Company shall remit to the General Agent all commission earned during said previous month. In the event the computation of commission earned at the end of any regular monthly adjustment period results in a deficit against the General Agent, this deficit shall be fully covered by a subsequent commission earning before any earned commission shall be due the General Agent.' 3 Hence the judgment is not to be deemed interlocutory. Lyon v. Goss, 19 Cal.2d 659, 670, 123 P.2d 11. 4 'The terms of a writing are presumed to have been used in their primary and general acceptation, but evidence is nevertheless admissible that they have a local, technical, or otherwise peculiar signification, and were so used and understood in the particular instance, in which case the agreement must be construed accordingly.' 5 Civil Code, sec. 1647. 'A contract may be explained by reference to the circumstances under which it was made, and the matter to which it relates.' 6 Code Civ.Proc., sec. 1860. 'For the proper construction of an instrument, the circumstances under which it was made, including the situation of the subject of the instrument, and of the parties to it, may also be shown, so that the Judge be placed in the position of those whose language he is to interpret.'