Tred R. Eyerly | Insurance Law Hawaii | December 19, 2018
The Eighth Circuit affirmed the district court’s judgment that the insurer acted in bad faith when it denied the insured’s claim based upon misrepresentations in the application after destruction of his house by fire. Hayes v. Metropolitan Pro. and Cas. Ins. Co., 2018 U.S. App. LEXIS 31813 (8th Cir. Nov. 9, 2018).
Hayes’ home was insured by Met under a homeowner’s policy. Hayes used the detached garage as part of a home base for his plumbing business. He also rented out the second and third levels of the residence to a tenant and her two children. When Hayes applied for the policy in 2007, Met argues he indicated on the application that the premises were not used to conduct business, and were not used as rental property.
The application, however, was a confusing document. Hayes testified that he did not recall personally completing the application in 2007, that he worked with an independent insurance agent when it was filled out, and it was signed with his signature stamp used by his sister. With regard to the tenants, the form asked whether “the residence was held exclusively for rental?” The pre-printed “x” was marked out next to the letter “N” in answer to the question. Regarding the business, the form asked whether “any farming or other business was conducted on the premises?” Again, a box indicating “no” was marked with a preprinted x. Hayes testified that while he did maintain some plumbing supplies at the property, very little of the plumbing equipment was located in the detached garage due to limited space. Further, he had a separate commercial business policy to cover the plumbing business in the detached garage.
On January 24, 2013, the home was destroyed by a fire. Hayes filed a claim with Met. Met made a notation as of January 28, 2013 that it believed the fire was intentionally set. By January 29, 2013, Met knew that Hayes was operating part of his business at the detached garage near the premises, and that he leased the upper portion of the premises to tenants.
Yet, Met did not deny the claim until August 5, 2014. It cancelled the policy ab initio based upon material misrepresentations, and enclosed a check for all premiums Hayes had paid, with interest. Hayes returned the premium check. Met also sent a check to Hayes’ bank for $127,342.97 to satisfy the balance due on Hayes’s mortgage.
Hayes sued Met in October 2014 for breach of contract and bad faith denial/investigation. The district court dismissed the breach of contract claim as time-barred. The court, however, entered judgment in favor of Hayes on the bad faith claim. The court found that the insurance application was completed by the independent insurance agent and signature stamped by Hayes’s sister. Further, the application contained ambiguous questions. Accordingly, there was a lack of evidence that Hayes knowingly provided false answers on the application with the intent to deceive. Damages in the amount of $439,455, and attorneys’ fees of $86,160 were awarded to Hayes.
The Eighth Circuit affirmed. Met could not insulate itself from a bad faith claim by creating the fiction that a contrct never existed by voiding or rescinding it “ab initio.” Hayes met his burden of proving the elements of bad faith under Nebraska law – Met had no reasonable basis for denying the claim and did so with knowledge or with reckless disregard of that fact.
The damage award was affirmed. The district court properly calculated the economic damages Hayes suffered as a result of Met’s bad faith refusal to pay pursuant to the provisions of the improperly rescinded contract. Finally, the attorneys’ fees award was also affirmed.