Fraud Voids Coverage
While Investigating Fraud Insurer Must Act in Good Faith
Mark Kohout defaulted on a loan secured by a mortgage on his home in Litchfield. The mortgagee, Mortgage Electronic Registration Systems, Inc., purchased the home for $170,000 at a sheriff’s sale, but it burned down during the six-month redemption period. Kohout’s insurance carrier, Illinois Farmers Insurance Company, had already suspected Kohout of making a fraudulent claim on the policy for an earlier loss. It issued a $170,000 check jointly to Homecomings Financial, LLC, the mortgage subservicer, and Kohout, after Homecomings submitted a claim for the fire loss. Homecomings deposited the check without Kohout’s endorsement. A jury later found Kohout guilty of defrauding Farmers on the previous unrelated claim. Kohout brought this suit under various theories seeking payment of the $170,000 insurance proceeds. The Minnesota Court of Appeals, in Mark Kohout v. Homecomings Financial, LLC, et al, No. A11-1765 (Minn.App. 07/09/2012), were asked to resolve the dispute.
Mark Kohout owned real property in Litchfield, Minnesota. On September 6, 2006, Kohout obtained a loan from Lendsource, Inc., and he secured the loan with a mortgage in favor of Mortgage Electronic Registration Systems, Inc. (MERS). The loan was later assigned and pooled with other loans in a trust. The mortgage required that Kohout obtain property insurance against loss by fire and that he name the mortgagee (Homecomings) as the lender or additional loss payee.
Kohout insured the property for $299,000 with Illinois Farmers Insurance Company under a Minnesota Standard Fire Insurance Policy. Homecomings was named as the mortgagee on the policy. The policy states: “16. Mortgage Clause. The word “mortgagee” includes trustee or loss payee. If a mortgagee is named in this policy, a covered loss will be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment will be the same as the order of the mortgagees. If we deny your claim, such denial will not apply to a mortgagee’s valid claim if the mortgagee: . . . . c. submits a signed, sworn statement of loss within 60 days after we notify the mortgagee of your failure to do so.”
The general conditions section of the policy includes a void-by-fraud provision: “Concealment or Fraud. This entire policy is void if any insured has knowingly and willfully concealed or misrepresented any material fact or circumstance relating to this insurance before or after the loss.”
Kohout defaulted on his note in May 2007, still owing $250,310. MERS foreclosed on the mortgage. It purchased the property for $170,000 at the sheriff’s sale in December 2007 and later conveyed it to USB. Kohout had a six-month statutory redemption period after the date of the property’s sale.
During that period, on February 16, 2008, a fire destroyed the dwelling on the property. Kohout notified Farmers of the loss. Farmers asked Kohout to submit a sworn statement as proof of loss several times. Kohout did not submit one until July 18, 2008. In his proof-of-loss statement, he claimed personal-property losses of $33,290, but he did not submit a proof-of-loss statement for the dwelling itself.
On June 19, 2008, one day before the redemption period expired, Farmers informed Homecomings that Kohout’s claim was under investigation as suspicious and that it had not issued any funds to him. It advised Homecomings that it could file its own claim under the policy’s mortgage clause. Homecomings did so on July 1, 2008.
On October 14, 2008, Farmers issued a check for $170,000-the amount of real-property loss claimed by Homecomings. The check was made payable to both Kohout and Homecomings but was delivered by mail to Homecomings. Homecomings asked Farmers to reissue the check payable only to Homecomings, but Farmers refused. In January 2009, Homecomings transferred the claim and check to Quality Claims Management Corporation, a public-insurance adjustor.
Quality Claims’s President Ronald Reitz requested that Farmers reissue a check payable only to Homecomings. Farmers again declined. It suggested that Reitz obtain Kohout’s signature. Reitz requested that Kohout endorse the check. Kohout agreed to endorse the check but only if Quality Claims paid him $20,000. Quality Claims declined; it deposited the check at Cornerstone Bank, without Kohout’s endorsement.
Before the February 2008 fire, Kohout had filed a claim with Farmers in October 2007 alleging that $160,000 in personal property had been stolen from the home. Farmers refused to make any payment on his claim because it found that he had misrepresented the items lost. After Kohout sued in that case, a jury found that he had “misrepresented or concealed a material fact with respect to his insurance claim with the intent to deceive or defraud [Farmers],” and the district court concluded as a matter of law that “[t]he policy of insurance is voided by [Kohout’s] misrepresentation or concealment of a material fact with respect to his insurance claim.” Judgment was entered in favor of Farmers on July 23, 2009.
Farmers later sent Kohout a letter stating that he had no further basis to submit a claim for the fire because his fraud had voided his policy.
Kohout commenced this lawsuit seeking the $170,000 in August 2010. The respondents and Kohout moved for summary judgment. The district court granted the respondents’ motions and dismissed all of Kohout’s claims.
Kohout argued that the district court erred by granting summary judgment in favor of the respondents.
The Court of Appeal concluded that the trial court correctly held that Kohout’s insurance policy is void.
Kohout argued that the policy is not void because Farmers never provided him with a notice of cancellation. Under Minnesota law, an insurer must give an insured 30 days’ notice if it cancels a policy for misrepresentation or fraud. But Kohout’s policy was not cancelled. It was instead deemed void.
Kohout contended that “void” and “cancel” mean the same thing. The Court of Appeal disagreed. “Cancel” means to destroy a written instrument by defacing or obliterating it or to terminate a promise, obligation, or right while “Void” means of no legal effect; null. More significant, the terms “cancelled” and “voided” are contained in two different statutory subdivisions. Neither the statute nor the insurance policy provision that incorporates it suggests that Farmers was required to notify Kohout before his policy became void as a result of his fraud.
Kohout also contended that, by issuing a check with his name on it, by requesting proof of his claim, by failing to deny his claim or assert the defense during the limitation period, and by issuing the check after knowing of the potential fraud, Farmers waived its right to assert fraud. The policy had not yet been declared void at the time of the check’s drafting, so Farmers was required to issue it to both parties.
The fraud at issue here was not in controversy in this case; it was previously proven in Kohout’s case arising from his rejected October 2007 insurance claim. Farmers’ reference in its answer noting Kohout’s prior fraud sufficiently put Kohout on notice of the defenses asserted in this case.
Because a jury found that Kohout intentionally defrauded Farmers on a claim before the fire, his policy with Farmers became void and the district court did not err by granting summary judgment on that basis.
This case is an example of how a prudent insurer dealt with a fraud, protected itself against the perpetrator of the fraud, paid the innocent mortgagee and still needed to go through trial and an appeal to establish that it was correct. That Kohout had the unmitigated gall to seek payment on a second loss after a jury found he had defrauded his insurer reveals why the tort of bad faith makes the cost of insurance excessive for everyone. Kohout filed suit hoping to bludgeon the insurer into paying a claim it did not owe because the cost of the defense exceeded the amount claimed. Illinois Farmers did the right thing, paid the mortgagee and the named insured, and defended the spurious lawsuit.
Since Kohout filed two fraudulent claims against Illinois Farmers I must wonder why no prosecutor has filed criminal charges against Kohout.
© 2012 – Barry Zalma
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.
He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.
Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012”; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.