A federal district court in Virginia has denied an insured's claim for attorneys' fees pursuant to Virginia law after finding that the insurer had acted in good faith in investigating the insured's representations on an application for insurance.
The Case
Robin Hiatt, the managing and sole member of Jeb Stuart Auction Services, LLC, asserted that he went to Diane Via Fulcher, an insurance agent at Burch Hodges Stone, Inc. (“BHS”) in Virginia, who assisted him in filling out an insurance application. According to Mr. Hiatt, while Ms. Fulcher went through the questions, another agent, Dianne Joyce, input Mr. Hiatt's answers into an electronic application.
Question Eight on the application asked:
DURING THE LAST FIVE YEARS (TEN IN RI), HAS ANY APPLICANT BEEN INDICTED FOR OR CONVICTED OF ANY DEGREE OF THE CRIME OF FRAUD, BRIBERY, ARSON OR ANY OTHER ARSON-RELATED CRIME IN CONNECTION WITH THIS OR ANY OTHER PROPERTY?
Mr. Hiatt, on behalf of Jeb Stuart, which was the sole applicant for the insurance policy, answered, “No.” Mr. Hiatt signed the application and left.
Mr. Hiatt, however, had been convicted of a crime of fraud within the preceding 10 years. During that time, he entered an Alford plea to charges that he obtained money by false pretenses and he admitted to hiring individuals to wreck cars so that he could receive the proceeds from the applicable insurance policies.
West American Insurance Company issued the policy to Jeb Stuart.
Thereafter, a fire destroyed the property insured by the policy. West American sent one of its claims adjusters, Anthony DeCesare, to investigate the fire. As part of his investigation, Mr. DeCesare had Mr. Hiatt engage in an examination under oath (“EUO”). During the EUO, Mr. Hiatt disclosed to West American that he had been convicted of several crimes that would have been responsive to Question Eight had he been the applicant. He also asserted that he had told Ms. Fulcher about his criminal history, but that she had replied that it did not matter because the application only concerned Jeb Stuart's history.
Upon learning of Mr. Hiatt's claim that he had told West American's representatives about his criminal history, West American did not follow up with Ms. Fulcher or Ms. Joyce to determine if that conversation had ever taken place.
Following the EUO, West American sent a letter to Mr. Hiatt informing him that West American would be denying Jeb Stuart's claims due to material misrepresentations on its application. West American took the position that Mr. Hiatt's personal criminal background was responsive to Question Eight and that, by failing to disclose it, Mr. Hiatt (on behalf of Jeb Stuart) had lied on the application.
Jeb Stuart sued West American to recover the value of the insurance policy it claimed had been wrongfully cancelled. At the summary judgment stage, the trial court held that, by its terms, Question Eight only addressed the “applicant's” criminal history and that, because Jeb Stuart was a legal entity separate and apart from Mr. Hiatt, Mr. Hiatt's answer to Question Eight was correct.
As a result, the court ruled, West American had wrongfully voided Jeb Stuart's policy and was liable for the appropriate coverage.
The court then held a bench trial to determine whether Jeb Stuart was entitled to its attorneys' fees pursuant to Va. Code Ann. § 38.2-209, which permits an insured to recover its attorneys' fees from its insurer where a court has determined that “the insurer, not acting in good faith, has either denied coverage or failed or refused to make payment to the insured under the policy.”
The Court's Decision
The court ruled that West American had acted in good faith in investigating Jeb Stuart's representations on the insurance application and, therefore, that Jeb Stuart was not entitled to recover its attorneys' fees from West American.
A number of factors led it to decide that West American had acted in good faith. First, the court found that reasonable minds could differ as to whether the question concerning criminal history applied to the LLC or to the LLC's members. The court said that, although the question, by its terms, applied to the applicant (the LLC), a reasonable person reading Question Eight might interpret it to apply to the individuals that made up the LLC, which “[u]ndoubtedly” was what West American had envisioned when it drafted the application, and Question Eight in particular.
The court also found that West American's position at the summary judgment stage – although ultimately incorrect – presented an issue of first impression, which supported a finding of good faith.
Finally, the court noted that Ms. Fulcher maintained that Mr. Hiatt only had told her that he had personal financial difficulties in the past and it decided that Ms. Fulcher and not Mr. Hiatt was more credible about whether or not Mr. Hiatt had revealed his criminal history to her.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].