Not Reading a Policy is Fatal to a Fire Claim

Foreclosure Voids Insurance Policy

In the last 51 years I have asked hundreds of insureds directly and under oath whether they read and understood their insurance policy. Most respond with nervous laughter. Only two, in 51 years, claimed to have read and understood the policy they purchased — both lied.

In Steve Papastefanou And Mary Papastefanou v. Kentucky Growers Insurance Company; PHH Mortgage Corporation; And First Security Mortgage Of Owensboro, Inc., NO. 2016-CA-001923-MR, Commonwealth of Kentucky Court of Appeals (September 7, 2018) failure to read the policy by the insureds and their mortgagee proved fatal to a claim.

After litigation Papastefanou sued the insurer only to find that the trial court concluded that  the filing of a foreclosure action by PHH Mortgage Corporation against Appellants voided a homeowner’s insurance policy. Not willing to accept the obvious both the insured and the mortgagee sued.


The Papastefanous purchased a house in 2005. They took out two mortgages, one with PHH and one with First Security Mortgage of Owensboro, Inc. As part of this mortgage transaction, Appellants obtained an insurance policy through Kentucky Growers. In 2011, Appellants became delinquent on their mortgage payments and a foreclosure action was filed against them by PHH. The action was held in abeyance while Appellants and PHH tried to come to terms on a mortgage modification.

On November 12, 2012, Appellants’ home burned, resulting in a total loss. Appellants filed a claim with Kentucky Growers, but Kentucky Growers denied their claim. Kentucky Growers claimed that the insurance policy was void at the time of the fire due to the following language contained in the policy: “The entire policy shall be void . . . if, with the knowledge of the ‘insured’, foreclosure proceedings be commenced or notice given of sale of any property insured hereunder by reason of any mortgage[.]”

Kentucky Growers also denied recovery to the mortgagees as they were also named in the policy. This denial was based on the following policy language: “If a mortgagee is named on the Declarations, a loss payable under Coverage A or B 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 precedence of the mortgages.”

The Papastefanous and the mortgagees sued Kentucky Growers. The insurer cross-claimed and First Security Mortgage answered the complaint and filed a counterclaim against Appellants and cross-claims against Kentucky Growers and PHH. PHH filed answers to Appellants’ complaint and First Security Mortgage’s cross-claim, but no claim against Kentucky Growers.

Ultimately, the trial court entered two orders granting summary judgment in favor of Kentucky Growers. The first order dismissed the Appellants’ personal claims and the second order dismissed the derivative claims.


It is well established that construction and interpretation of a written instrument are questions of law for the court. Two cardinal principles apply in the interpretation of insurance contracts by Kentucky courts. Those principles are:

  1. the contract should be liberally construed and all doubts resolved in favor of the insureds; and,
  2. exceptions and exclusions should be strictly construed to make insurance effective.

Terms used within insurance contracts should be given their ordinary meaning as persons with the ordinary and usual understanding would construe them. Appellants claim that the foreclosure provision was hidden deep within the policy and is not easily understood. The Court of Appeal disagreed. The policy provision is clear and unambiguous as it has no other interpretation and Appellants do not allege how this provision could be misunderstood. In addition, the provision was not hidden. Although the policy is 22 pages long, the exclusionary provision is not hidden in small or fine print.

Courts cannot, however, make a new contract for the parties under the guise of interpretation or construction but must determine the rights of the parties according to the terms agreed upon by them. The terms and conditions of the policy are clear, and the Court of Appeal did not believe the court erred.

Appellants freely entered into this contract with Kentucky Grower. Insured persons are charged with knowledge of their policy’s contents. Since the policy is a written contract, its terms are binding on both parties, and after acceptance, the mere lack of knowledge of its contents by the insured could not furnish a sound legal basis for reforming it or voiding its provisions.

By entering into the insurance agreement with Kentucky Growers, Appellants were charged with knowing the contents of their policy; therefore, they knew or should have known about the voiding provision. This knowledge would have allowed Appellants the opportunity to purchase additional insurance once the foreclosure action was commenced or inform Kentucky Growers of the foreclosure and request continued coverage. The notice statutes set forth above do just that, provide notice to an insured of the cancellation or non-renewal of their policy.

Appellants were put on notice of the voiding of their policy via the policy itself. No public policy was violated in this case.


The Papastefanous and their mortgagees could, had they read their policy, protected themselves while negotiating the foreclosure proceeding by simply advising the insurer of the foreclosure and requesting extension of coverage or by acquiring insurance from a different insurer. They did not do so because they did not read the clear and unambiguous language of the policy. They have no one to blame but themselves.

© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at can be reached at

Mr. Zalma’s reports can be found on Tumbler at  on Facebook at and you can follow him on Twitter at

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.



About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.