Bituminous Casualty Corporation, and Cross-Appellant v. James T. Lynn, Secretary of Housing and Urban Development, and Cross-Appellee

"The claim arises from the violent destruction, during the night of AugustPage 63824-25, 1968, of certain heavy mining equipment owned by Clairfield Equipment Company, Inc. (`Clairfield') and located at a mining site on Red Bird mountain in Leslie County, Kentucky. The destroyed equipment had been insured against loss, including loss from riot, by an inland marine policy issued by Bituminous to Clairfield. The premium paid by Clairfield to Bituminous for this policy was included in the total of inland marine premiums on which the Secretary calculated the premiums for the reinsurance contract.

"Clairfield was owned and controlled by the U. R. Arnold family. The insured equipment, was leased to two corporations, also operated by the Arnolds, which operated a strip mine and a deep mine at the site involved here. Approximately twenty employees, members of the Southern Labor Union, worked at these mines. The Arnolds also employed a local resident to act as watchman and to guard the mine and equipment after working hours.

"At approximately 10:00 P.M., on the night of August 24, 1968, an armed gang of three or four men descended upon the watchman, assaulting him and forcibly removing from his person the guns which he had used to protect the mines and equipment. He was thrown to the ground, kicked about the head and told that he might be killed. The gang forcibly broke into a trailer containing high explosives, and, for more than four hours, with the watchman bound and blindfolded, they planted the explosives beneath every piece of valuable equipment on the site. As they went about their task, the gang continued to threaten the watchman and at one point some of them suggested that he be tied to the equipment and destroyed along with it. The destruction was accomplished by a prolonged series of explosions. The first of the blasts terrorized not only the watchman, but the members of the gang as well. A separate rate fuse was lit beneath each piece, and, for a sustained period, the mountain was shaken by a sequence of blasts. Persons living in the vicinity, including those on the other side of the mountain, as much as five miles away, were awakened and frightened by the tumult. The explosions were so violent that their houses were shaken. It appeared to some that `the mountain was a ball of fire' and to others that `the sky was lit up'."

"Pursuant to the provisions of the Urban Property Protection and Reinsurance Act of 1968 and subject to the terms and conditions herein set forth, the REINSURER hereby obligates itself to pay, as reinsurance of the COMPANY, the amount of the COMPANY'S excess aggregate losses resulting from riots or civil disorders in such lines of mandatory and optional coverage as may be designated herein separately for each State."

"a. any tumultuous disturbance of the public peace by three or more persons mutually assisting one another in execution of a common purpose by the unlawful use of force and violence resulting in property damage of any kind;

"b. two or more unlawful and terroristic acts or occurrences which, under similar circumstances, take place within reasonable proximity as to time and place, at least two of which acts or occurrences each result in property damage of any kind in excess of $1,000 or;

"c. any other unlawful and terroristic act or occurrence, resulting in property damage of any kind, which may reasonably be determined by the REINSURER, on the basis of evidence submitted by the COMPANY, to have been,Page 639under the circumstances, a form of civil disorder."

"Nevertheless, it was the recommendation of our internal Claims Review Committee, and my ultimate decision as Administrator, that the type of loss involved was not one covered, or intended by the Congress to be covered, under the Standard Reinsurance Contract. It was our conclusion that the loss resulted from traditional malicious mischief rather than from the type of riot or civil disorder envisaged by the Urban Property Protection and Reinsurance Act of 1968.

"Specifically, the Congress, in broadening the scope of the program from the catastrophic coverage originally contemplated, stated:

"It has been pointed outthat there hasrecentlybeen a pattern of losses resulting from intentionally caused fire or other property damage which may or may not be connected in time or place to riots or group activity, but which could be determined to be a form of civil disorder. It is the view of the committee that losses of this nature might be considered by the Secretary when he issues regulations delineating the precise scope of `losses resulting from riots or civil disorders.' (Emphasis supplied.) House Report No. 1585, Committee on Banking and Currency, 90th Congress, 2d Session, p. 80.

"Both the testimony which led to the expansion of the scope of the Act, and the reference in the Committee Report to therecentpattern of intentionally-caused losses, make clear that the types of civil disorder intended to be covered were isolated or related acts of terrorism directed at an identifiable population or significant segment thereof by militant groups, often having racial cause, but having in common a primary motivation of civil protest or civil disruption; as distinguished, for example, from destructive acts directed toward a single employer or organization (as is typical of labor disputes), and particularly as distinguished from isolated acts which do not involve, either directly or indirectly, a community or a population. In summary, what we believe the Congress intended, and what we certainly intended by the (B) and (C) definitions of our Contract, was coverage primarily for terroristic acts affecting a population, which cause property damage, but which fall short of the mass riots which occurred in Watts, Newark, and Detroit, for example. Under the circumstances presented, where motive is unknown, the possibly related acts were distant both in time and place, and no population was affected, we do not believe that we can stretch either the intention of the Congress or the wording of the Contract to provide the reinsurance coverage you seek."

"In fashioning a federal rule we are, of course, guided by the general principles that have evolved concerning the interpretation of contractual provisions such as that involved here. Among these principles is the general maxim that a contract should be construed most strongly against the drafter, which in his case was the United States. (Footnotes omitted.)

"Finally, our interpretation adheres to the principle that as between two reasonable and practical constructions of an ambiguous contractual provision, such as the two proffered by the Government, the provision should be construed less favorably to that party which selected the contractual language. This principle is appropriately accorded considerable emphasis in this case because of the Government's vast economic resources and stronger bargaining position in contract negotiations." (Footnotes omitted.)397 U.S. at 210,216,90 S.Ct. at 885,887.

"(1) encourage and assist the various State insurance authorities and the property insurance industry to develop and carry out statewide programs which will make necessary property insurance coverage against the fire, crime, and other perils more readily available for residential, business, and other properties meeting reasonable underwriting standards; and (2) provide a Federal program of reinsurance against abnormally high property insurance losses resulting from riots and other civil commotion, placing appropriate financial responsibility upon the States to share in such losses." Urban Property Protection and Reinsurance Act of 1968, Pub.L. No.90-448, § 1102(b).

"Southeastern Kentucky has been plagued with an insurance crisis not unlike that which has existed in the inner cities. Because of the violence which has characterized relations within the coal industry, there has been an exodus of insurance companies from that area. Of the more than four hundred casualty companies operating in Kentucky, less than ten percent of them will accept any risk in the southeastern part of the State. Only two or three insurance companies, one of them Bituminous, will still write insurance voluntarily on coal properties. The absence of federal riot reinsurance would render property insurance virtually unavailable to the coal industry. This, in turn, would have serious adverse effect upon the ability of the industry to obtain financing and otherwise to operate."

"There is no merit to the Defendant's further contention that the acts of the gang here did not amount to a disturbance of the public peace and that they were not tumultuous. Even if the explosions and the terrorizingPage 642of the local population were ignored, the assaults upon the watchman were more than sufficient to amount to a tumultuous disturbance of the public peace."

"The cases wherein destructive activity has been found to be riotous have been ones where the illegal act was accompanied by the use of force, or the threat of use of force, against anyone who might interfere with the criminal enterprise.See e. g.,Insurance Co. of North America v. Rosenberg,25 F.2d 635(2d Cir. 1928); Brous v. Imperial Assur. Co.,130 Misc. 450,224 N.Y.S. 136(1927), aff'd,223 App. Div. 713,227 N.Y.S. 777(1928); Germania Fire Ins. Co. v. Deckard,3 Ind. App. 361,28 N.E. 868(1891). The only other case to construe a reinsurance contract under the National Insurance Development Program reached a conclusion consistent with these cases. In Bituminous Casualty Corp. v. Romney, (amended mem. opinion, E.D.Ky. 1973), the court found a riot, as defined in a provision of the contract identical to the one in issue here, in the actions of three or four men who overpowered, bound and threatened the night watchman at a coalfield and who then destroyed valuable mining equipment with explosives. On the other hand, stealthy destructive activity accomplished without force or threat of force to those who might interfere has been found not to constitute a riot, . . ."

[29] 2) POST-JUDGMENT INTEREST

"The federal riot reinsurance program is operated by the National Insurance Development Fund (12 U.S.C. Sec. 1748bbb-1 through 1749bbb-20). This instrumentality functions as a business entity with the capacity to sue and be sued with respect to its transactions. (12 U.S.C. § 1749bbb-10 and1749bbb-11(b)). The program is self-supporting, drawing on premium and investment income. It has been operated at a substantial profit since its inception. It is subject to the same incidents of suit, including allowance of interest, as a private business entity."

"Some question was made as to the allowance of interest. When the United States went into the insurance business, issued policies in familiar form and provided that in case of disagreement it might be sued, it must be assumed to have accepted the ordinary incidents of suits in such business. The policies promised that claims would be paid within 30 days after complete proofs of interest and loss had been filed with the Bureau of War Risk Insurance. The proofs seem to have been filed on January 11, 1917. Interest at six per cent, should be allowed from February 11, 1917."Id.at 79,45 S.Ct. at 212.

"The act authorized the Bureau to adopt and publish forms of policies and to establish reasonable rates. The policies adopted by the Bureau and used in that case contained a promise to pay losses within a specified time. Under that form of contract private underwriters are liable for interest when payment is not made as agreed. There was nothing in the statute to disclose an intention on the part of the United States to bear any part of the cost of the insurance or to give pecuniary aid to the owners of vessels or other property insured. And as a matter of fact a large profit resulted from the operation of the business. Annual Report of the Director of the U.S. Veterans' Bureau, 1923, p. 675."

"As indicated in Keifer Keifer v. Reconstruction Finance Corp.,supra,we start from the premise that such waivers by Congress of governmental immunity in case of such federal instrumentalities should be liberally construed. This policy is in line with the current disfavor of the doctrine of governmental immunity from suit, as evidenced by the increasing tendency of Congress to waive the immunity where federal governmental corporations are concerned. Keifer Keifer v. Reconstruction Finance Corp.,supra.Hence, when Congress establishes such an agency, authorizes it to engage in commercial and business transactions with the public, and permits it to `sue and be sued', it cannot be lightly assumed that restrictions on that authority are to be implied. Rather if the general authority to `sue and be sued' is to be delimited by implied exceptions, it must be clearly shown that certain types of suits are not consistent with the statutory or constitutional scheme, that an implied restriction of the general authority is necessary to avoid grave interference with the performance of a governmental function, or that for other reasons it was plainly the purpose of Congress to use the `sue and be sued' clause in a narrow sense. In the absence of such showing, it must be presumed that when Congress launched a governmental agency into the commercial world and endowed it with authority to `sue or be sued', that agency is not less amenable to judicial process than a private enterprise under like circumstances would be.

"Clearly the words `sue and be sued' in their normal connotation embrace all civil process incident to the commencement or continuance of legal proceedings." (Footnote omitted.)

"The financing arrangement envisions a reinsurance program whichPage 645can be self-supporting, drawing on reinsurance premiums paid by insurance companies and payments by the States to cover losses from riots and civil disorders which exceed the losses retained by the insurance companies. If riot losses throughout the Nation resulted in reinsurance claims in excess of the aggregate amount of reinsurance premiums received by the Secretary, the excess would be paid from funds borrowed by the Secretary from the Treasury, to be repaid from future reinsurance premiums." 1968 U.S. Code Cong. Adm.News, p. 2962.