John D. Lummis and his ex-wife Cynthia Macbeth own a house where Lummis lived with his girlfriend, Beth Howe, and her three children. “Lummis was in a financial bind: between the $1,300 a month garnished from his wages in order to pay child support for four of his six children, and supporting Howe and her three children, he had not made a mortgage payment for almost two years.”
The mortgage holder, Cendant Mortgage Co., had been paying the premiums on the State Farm homeowner’s insurance policy. On Feb. 5, 2003, Cendant obtained a mortgage foreclosure decree on the house. The next day, the house burned to the ground.
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Howe called 911 to report the fire around noon. She then phoned Lummis at work. Lummis’s boss offered him a ride home immediately. He turned it down. But he took his buddy up on a second offer of a ride home later in the afternoon.
After Lummis got home, he reported the fire to State Farm. “The agent who took his call thought he sounded pretty nonchalant and cavalier about the whole thing.” State Farm immediately started an investigation of the claim.
“One of the most important clues to the fire’s origin was a red plastic container found at the scene that tested positive for traces of gasoline and kerosene. Lummis, who was a volunteer firefighter for about seven years, would, State Farm concluded, be more familiar with this mixture as an accelerant than would the average Joe,” according to the court’s report.
“Ultimately, all investigators who looked into the fire determined that it was started intentionally. State Farm concluded that Lummis, perhaps with help from Howe, intentionally started the blaze, so it denied coverage.”
Lummis and Macbeth sued insurer State Farm for breach of contract after its refusal to cover the arson fire loss because of the insured’s suspected complicity in setting the fire. The insureds argued State Farm showed bad faith by refusing to pay the claim.
If you were the judge would you order State Farm to pay Lummis and Macbeth the insured fire loss under the homeowner’s insurance policy?
The judge said no!
A finding of bad faith requires evidence of a state of mind reflecting dishonest purpose, moral obliquity, furtive design or ill will, the judge began. Lummis tried to prove State Farm denied coverage without a rational, principled basis for doing so, he noted.
But the evidence showed arson by someone was unquestionably committed, the judge explained.
“Add to this the fact (1) Lummis had a potential financial benefit in collecting something under the policy; (2) that he was in a financial pinch; (3) that he and Howe purchased gasoline the morning of the fire; (4) that Howe removed her dog from the house before it burned down; and (5) that the fire occurred one day after the foreclosure proceeding, and State Farm’s position, as a matter of law, simply cannot be viewed as unreasonable or motivated by ill will,” he explained.
“Based on all the evidence, no reasonable jury could find that State Farm denied Lummis’s claim knowing there was no rational, principled basis for believing he, perhaps with Howe, was involved in setting the fire,” the judge emphasized. Because Lummis did not prove bad faith claim denial, State Farm was justified in denying this insurance claim, the judge ruled.
Based on the U.S. Court of Appeals decision in Lummis v. State Farm Fire and Casualty Co., 469 Fed.3d 1098.
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