Coverage Denial Under “Concealment or Fraud” Provision
In Barth v. State Farm Fire and Cas. Co., 2008 WL 733897 ( Ill. , 2008), a fire destroyed plaintiff Barth's home and he filed a fire loss claim with his insurer, State Farm. State Farm denied the claim under an exclusion in Barth's policy voiding coverage if the insured intentionally concealed or misrepresented a material fact impacting coverage. Barth filed a complaint against State Farm in the trial court seeking damages after the denial of coverage.
The fire that destroyed Barth's home began while he was out with William Penn and Penn's friend William Burmeister. Barth was disabled and had hired William Penn to drive him and perform errands. The fire was immediately determined to be suspicious, and State Farm began an investigation.
During State Farm's investigation, Barth made several misstatements but allegedly corrected them before or during his final examination under oath. State Farm denied his claim under the provision in the policy voiding coverage if the insured intentionally concealed or misrepresented a material fact relating to the coverage either before or after a loss. Barth filed a three-count second amended complaint for breach of contract, unreasonable and vexatious delay and refusal to pay, and intentional infliction of emotional distress. State Farm filed three affirmative defenses: (1) the policy's “intentional act” provision; (2) the policy's “concealment or fraud” provision (second affirmative defense); and (3) set-off. Only the second affirmative defense was at issue in the appeal.
The trial court rejected the jury instruction offered by Barth on the elements of reasonable reliance and prejudice. The jury then rendered a special verdict in favor of State Farm, finding that it proved its second affirmative defense, the exclusionary clause, by clear and convincing evidence.
Barth claimed the jury should have been instructed that State Farm must have both reasonably relied on his misrepresentations and, as a result, suffered prejudice or injury to succeed on its second affirmative defense. Barth asserted that without this requirement insurers could unfairly deny coverage due to an insured's alleged misrepresentations without proving all the elements of fraud, therefore requiring proof of reasonable reliance.
The Supreme Court of Illinois disagreed, holding that appellate court properly affirmed the trial court's use of State Farm's materiality instruction. The court explained that the materiality instruction given to the jury was sufficient in the context of a policy provision voiding coverage if the insured “intentionally concealed or misrepresented any material fact or circumstance, before or after the loss.” The requirement implicated a reasonable connection between the insured's concealment, misrepresentation, or false statement and the insurer's actions or attitude in investigating the claim. Thus, according to the court, the instruction adequately covered the fundamental concerns raised by Barth's argument about the need for a showing of reasonable reliance and injury to preclude any potential “mischief” by unscrupulous insurers. The court stated that the exclusion was not based on common law fraud and, thus, did not require all the elements of that tort to avoid injustice to insureds.
Barth also contended that the exclusionary provision in the policy did not specifically prohibit a requisite showing of reasonable reliance or injury, required to show common law fraud. He claimed that strictly construing this provision against the insurer and in favor of coverage properly limited insurers' use of a fraud defense, particularly when, as in this case, the insured later corrects the misstatement.
The court explained that while this provision did not specifically exclude the common law fraud elements of reasonable reliance and injury, it also did not attempt to define common law fraud, and nothing in the text purported to rely on common law fraud definitions. As the language used unambiguously conveyed the contours of the exclusion, the court stated that it could not properly read into that language any additional terms. Therefore, the court rejected Barth's argument that reading the exclusion against the insurer required the court to add common law fraud elements into the policy when they were not specifically excluded.
Regarding the two other issues raised on appeal, the court also affirmed the appellate court's decisions that recusal from the case of the trial judge because he was insured by State Farm was not necessary and that the jury verdict was supported by sufficient evidence.