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.

FACTS

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.

ANALYSIS

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.

ZALMA OPINION

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 http://www.zalma.com and zalma@zalma.com.

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

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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.
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