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Company, Not Manager, Was Insurance ‘Applicant’

Deborah Elkins//August 27, 2015

Company, Not Manager, Was Insurance ‘Applicant’

Deborah Elkins//August 27, 2015//

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An insurance carrier must cover fire damage to an auction company’s property occurring two months after the policy issued, even though the sole member/manager of the company had prior convictions for obtaining money by false pretenses for paying people to wreck cars for fraudulent insurance claims; the Danville U.S. District Court says the insurance application clearly identified Jeb Stuart Auction Services LLC, not the company manager, as the “applicant” for the policy; the auction company also may pursue a bad faith claim.

Plaintiff auction company contends that questions directed to the “applicant’ referred only to the corporate entity; defendant West American contends the term “applicant” on the application also encompassed the auction company sole member/manager individually. Because the insurance contract between the auction company and West American was formed in Virginia, Virginia law applies.

In Virginia, an insurer seeking to rescind an insurance contract based on an alleged misrepresentation contained in the application must prove: 1) than answer or statement was material to the risk when assumed; and 2) that it was untrue. Whether a misrepresentation is made and the terms on which it is made are questions of fact for the jury (if material issues of fact remain); but, when proved, its materiality is a question for the court.

The parties appear to agree that one question determines the outcome of this case: whether the term “applicant” in the application referred solely to the auction company or whether that term also encompassed the manager. The term “applicant” is not ambiguous. It refers only to the party applying for insurance. In reaching this conclusion, one need look no further than the application itself. Although it does not explicitly define the term “applicant,” only one party is listed under the heading “Applicant Information – Name:” Jeb Stuart Auction Services LLC. Moreover, under the “Crime Section,” only Jeb Stuart Auction is listed as “Applicant.” Under the Commercial General Liability Section, only Jeb Stuart Auction is listed as “Applicant.” And under the “Additional Interest” section, only Jeb Stuart Auction is listed as “Applicant.”

The policy itself confirms that Jeb Stuart, not the manager, applied for insurance in January 2014. The policy insured property owned by Jeb Stuart, not the manager. Premiums were owed by the company, not the manager. In the event of a loss, the policy would pay out to the company, not the manager. Only the company, not the manager, could sue to enforce the policy. In fact, only the company has brought suit here. It the manager were actually an applicant and beneficiary under the policy, surely he would have joined this action as a plaintiff.

Both dictionary and statutory definitions under Va. Code § 38.2-602 are helpful in confirming this conclusion.

Carrier contentions

West American offers several rationales to avoid this ruling, but they are unavailing. If West American were concerned about the sins of the LLC’s sole member, it should have asked about those sins. Here, it did not. If West American wanted different information related to its risk assessment, it is obliged to ask a different question. Neither the applicants for insurance nor this court are in the business of divining what West American really wants to know, and then turning applications questions on their head to interpret them to mean what they do not say. In essence, West American complains of the manager’s failure to answer questions which it did not ask. That is not grounds to rescind the policy.

Turning to the issue of whether West American’s denial of Jeb Stuart’s claim was in bad faith, the Supreme Court of Virginia is currently considering the question of whether “bad faith” denial is a question of law for the court or fact for the jury. Therefore, I will deny West American’s motion for summary judgment on this issue. Even if the Supreme Court were not currently considering the issue, disputes of material fact preclude summary judgment on this claim. I believe a fact finder must examine the question of whether the manager accurately portrayed his criminal record to the insurance agent. I believe the facts surrounding those conversations are highly relevant, although not necessarily dispositive. The parties differ vastly on whether the manager was honest or circumspect in the information he gave the agent. If he was honest and West American was on notice of his criminal record, I do not believe West American’s cancellation of the policy could be characterized as in “good faith.” On the other hand, if the manager intentionally misled the agent regarding his criminal record, it is possible that West American’s position, although ultimately incorrect, was undertaken in good faith. Because the facts surrounding that conversation are in dispute, summary judgment is not appropriate on count III.

The auction company is entitled to summary judgment on liability under count I, count II in its entirety and on West American’s counterclaim. Count III and damages under count II will proceed to trial.

Jeb Stuart Auction Services LLC v. West American Insurance Co. (Kiser) No. 4:14cv47, Aug. 13, 2015; USDC at Danville, Va. VLW 015-3-407, 13 pp.

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