Notification Requirement Upheld by Court
May 26, 2015
The insurer brought an action against its insured seeking a declaration that the homeowners policy did not provide coverage after the insured's then-husband and coinsured accidentally started a fire while manufacturing and smoking marijuana in the basement. This case is Nationwide Mut. Fire Ins. Co. v. McDermott, No. 14-1623, 2015 WL 756206 (6th Cir. Feb. 24. 2015).
This case involves a dispute about whether the insured, Kasey McDermott has coverage under her Nationwide policy for a fire caused by the acts of her then-husband, Brian. Brian was manufacturing and smoking marijuana in the basement, started a fire, and burned down the house. Nationwide initially paid $160,209.50 for the loss but after an investigation, the insurer learned about the marijuana activities and then filed a declaratory judgment action. The insurer sought a declaration that its policy did not provide coverage for the loss and that the insured had to reimburse Nationwide for the amount paid.
The district court granted summary judgment to the insurer and this appeal followed.
The United States Court of Appeals, Sixth Circuit, noted that Brian became a licensed medical marijuana patient and caregiver pursuant to state law. After obtaining his registry identification card, Brian worked up to eight hours a day to operate and expand his marijuana operation. He spent upwards of $20,000 on lab equipment, lighting, and fertilizer. The operation took place in the basement. Later, Brian learned of a process known as butane extraction which involved highly flammable butane. He was performing butane extraction one day when a flame he had lit to smoke, ignited the butane, resulting in a fire that destroyed the entire house.
Nationwide initially paid for the loss but after an investigation, the insurer learned of the marijuana activities. The policy specified which types of losses were not covered and one of these was a loss caused by an intentional act of the insured or a loss occurring while the hazard was increased by a means within the control and knowledge of an insured. Furthermore, the policy required the insured to notify the insurer as soon as possible of any change that may affect the premium risk, including changes in the occupancy or use of the residence premises. That is when Nationwide filed its motion for declaratory judgment.
After the district court granted the insurer's motion for summary judgment, McDermott, on appeal, argued that as an innocent coinsured under Michigan law, she was entitled to recover under the policy despite Brian's conduct and should not be required to reimburse Nationwide. The appeals court said that it agreed with the district court. The failure of the insured to report a change in the use of the residence premises required affirmance.
The Circuit Court said that the marijuana operations effectively changed the use of the basement from a storage area to an area where the then-husband was manufacturing and processing marijuana. The failure of the insured to notify Nationwide of this change was a failure to fulfill the notification condition in the policy, and by this failure, the insured knowingly omitted a material fact which would have affected the insurer's opinion of the coverage. McDermott failed to satisfy one of the terms of the insurance contract, namely her duty to notify the insurer of a material change in the use of the premises and so, the insurer can deny coverage for the loss.
Because McDermott was not entitled to recover under the policy, the court also held that Nationwide was entitled to subrogation.
Editor's Note: The U.S. Court of Appeals, in its affirmation of the district court ruling in favor of the insurer, in essence rules that it is impossible to hold an insurance company liable for a risk it did not assume. In this instance, Nationwide assumed it was insuring a residence when in fact, it was unknowingly insuring a marijuana processing facility. The insured had a contractual duty to notify the insurer of this operation and the failure to do so resulted in voiding coverage.