Insurance Law

Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation: Insurance Competence Needed to Commit Insurance Fraud

Arson is relatively easy. Pour some gasoline and light a match and a fire will burn. Successfully turning an arson fire into profit is more difficult and requires some knowledge of insurance and insurance claims. In Ross v. State Farm Fire and Cas. Co., Slip Copy, 2015 U.S. Dist. LEXIS 18707 (S.D.Ohio, 2/17/15), [enhanced version available to lexis.com subscribers], the District Court for the Southern District of Ohio dealt with an attempted arson-for-profit by a person who had no knowledge of insurance and what is necessary to make a successful claim to an insurance company.

State Farm denied the claim of Mr. Ross after a fire at a dwelling in Dayton Ohio.

FACTUAL BACKGROUND

A fire occurred on October 31, 2012, to a real property located in Dayton, Ohio (the “Property”). At the time of the fire, the Property was owned by Djuna Brown–Jennings. Ross, the only person insured by the State Farm policy, had owned the Property. He lived at that address until March or April of 2012. Ross moved out when renovations were started. He testified that he expended nearly $20,000 to renovate.

Ross was the prior owner of the Property and had deeded it to Djuna Brown–Jennings, his sister, prior to the fire. Ross planned to deed the Property back over to Luxury Sports Superstore, LLC, an entity that he allegedly owned. He claimed that he transferred the Property to his sister because he did not think he could transfer the Property directly to Luxury Sports Superstore without waiting a year. State Farm was not made aware of the Property transfer prior to the fire.

The fire was called into the Dayton Fire Department at 9:59 p.m. on October 31, 2012. Fire crews arrived at the Property at 10:03 p.m. The Dayton Fire Department’s report notes that the fire was incendiary and the material causing the fire was gasoline.

State Farm retained Fire and Explosion Consultants, LLC to determine the cause and origin of the fire who determined that the fire was intentionally set with the use of gasoline and an open flame ignition source. All other potential causes of the fire were eliminated according to the consultants’ report.

Relative to the issues in this case, the Policy includes the following provision regarding concealment or fraud: “This policy is void as to you and any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance, whether before or after a loss.”

On July 3, 2013, State Farm denied Ross’s claim and voided the Policy for multiple reasons. The Policy premiums paid after October 31, 2012, were refunded to Ross.

ANALYSIS

State Farm asserted that the Policy should be voided because Ross misrepresented or concealed material information pertinent to his claim and that Ross did not have an insurable interest in the Property at the time of the incident so he could not collect under the Policy, and that it did not act arbitrarily, capriciously or without reasonable justification when it denied Ross’s claim and voided the Policy. Ross responded claiming genuine issues of material fact.

Insurable Interest

In Ohio, and every other U.S. jurisdiction, a policy owner must have an insurable interest in the subject matter of the insurance. If not, the policy is void. A person has an insurable interest when the person would profit by or gain some advantage by the continued existence of the property or would suffer a loss or disadvantage by the destruction of the property. In this case there was evidence that Ross had made an investment in the Property, including renovations, prior to deeding it to his sister. However, the Property was owned by Ross’s sister, Djuna Brown–Jennings, at the time of the fire.
Even though Ross indicates that he planned to deed the Property to Luxury Sports Superstore in the future and assuming that he alone could cause this to happen, Ross was not the owner of the Property at the time of the fire.

Therefore, even though Ross may have made an investment in the Property before the fire, he did not own the Property. Further, since Ross was not the only member of Luxury Sports Superstore, LLC, at the time of the fire, he alone would not profit by the continued existence of the Property and would not suffer a loss or disadvantage by the destruction of the Property.

Since Ross did not have an insurable interest in the Property at the time of the fire the Policy was void at the time of the fire.

Misrepresentation Or Concealment of Material Information?

The Policy at issue here is void if any insured intentionally concealed or misrepresented any material fact or circumstance relating to the insurance. A misrepresentation is material if, in the context of an insurer’s post-loss investigation, the false statement concerns a subject relevant and germane to the insurer’s investigation. Therefore, false answers are material if they might have affected the attitude and action of the insurer or if they were calculated either to discourage, mislead or deflect the insurer’s investigation in an area that might seem to the insurer a relevant or productive area to investigate. Finally, materiality can be decided by a court if reasonable minds could not differ on the materiality question.

Although there is no evidence as to when the fire was set there was evidence that the fire was first reported to the Dayton Fire Department at 9:59 p.m. on October 31, 2012. Ross indicated that he was at Luxury Sports Superstore, his place of business, until about 7:00 or 8:00 p.m. on the night of the fire after which he went to the Marriott. He also indicated that he arrived at the Marriott ten (10) to twenty (20) minutes later. Video at the Marriott, accurate to within fifteen (15) minutes, showed Ross arriving at 9:52 p.m.

Based upon the accuracy of the video time, Ross could have had the opportunity to start the fire and proceed to the Marriott. Ross’s statement that he left his office between 7:00 p.m. and 8:00 p.m. and arrived at the Marriott ten (10) to twenty (20) minutes later is shown to be a misrepresentation by the video at the Marriott. Ross, therefore, misrepresented the time at which he arrived at the Marriott.

This misrepresentation is material to State Farm’s investigation because if Ross’s whereabouts was unknown between 8:20 p.m. at the latest and 9:37 p.m. at the earliest and the fire was reported at 9:59 p.m., Ross could have had time to start the fire. Ross tried to avoid summary judgment by asserting that he was never prosecuted for the fire. This assertion is, of course, irrelevant as to whether Ross misrepresented his whereabouts at the time of the fire. Ross made a misrepresentation of a material fact to State Farm relating to State Farm’s insurance coverage of the Property. Thus, based upon language in the Policy, the Policy is void.

Bad Faith?

An insurer, such as State Farm, has a legal duty to act in good faith, and a bad faith refusal to settle a claim is a breach of the legal duty to act in good faith. In this case, State Farm had reasonable justification for denying Ross’s claim and voiding the Policy. Ross did not have an insurable interest in the Property, and State Farm thought that Ross had materially misrepresented his whereabouts at the time of the fire.

The court concluded that Ross did not have an insurable interest in the Property and that as a matter of law the Policy was properly voided by State Farm. The court also concluded that Ross misrepresented his whereabouts at the time of the fire to State Farm and that according to its terms, the Policy was properly voided by State Farm. Finally, it concluded that State Farm’s voidance of the Policy and failure to pay Ross’s claim was reasonable under the circumstances and was not an act of bad faith.

ZALMA OPINION

Mr. Ross was ignorant of the law of insurance. He maintained insurance on a property in which he had no interest. To obtain the benefits of an insurance policy the person must be insured and must have an interest in the property, the risk of loss of which is insured, so that its loss will cause some damage to the insured. Ross had no interest since he gave it away to his sister. Further, he lied to his insurer about his conduct on the night of the arson fire thereby voiding any coverage that existed.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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